Lewis Corey

The Decline of American Capitalism

The Antagonism Between Production and Consumption

Excess Capacity, Competition, and Speculation

THE antagonism between production and consumption, the conflict between the absolute expansion of one and the conditional expansion of the other, was particularly sharp in the period 1923-29. The growth of new and old industries, the consequent increasing output and absorption of capital goods, and the rising productivity of labor greatly augmented the forces of production, which clashed with the limited conditions of consumption. These developments resulted in a higher composition of capital, an increase in excess capacity, the intensification of competition, more superabundant capital, and a stronger downward pressure on the rate of profit. The situation was already acute in 1926; and the danger was recognized by a financial journal:

“Capital has become so abundant that it seeks to sell itself for use in almost any sort of productive enterprise ... This country has an exceedingly ample equipment of manufacturing plant; its efficiency level, in rising decidedly, has for practical purposes increased the proportions of our overequipment; and it is enabled to continue for the present by the superabundance of capital which seeks incessantly some place in which it may earn a reasonable return for its use. This is the general mechanism by which manufacturing competition has now been sharpened to unprecedented severity. The competition must go on, for failure to compete will mean the rapid destruction of capital; necessarily the failure to succeed will also mean the loss of capital; and loss of this character is certain to occur on a pretty considerable scale because our production is obviously greater than our power to absorb it.” [1]

“Superabundance of capital” – because of low wages and high profits, of changes in the composition of capital and the increasing appropriation of surplus value.

“Our production is obviously greater than our power to absorb it” – because capitalist production and accumulation limit purchasing power and consumption among the masses of workers and farmers.

The tendency of the rate of profit to fall was strengthened. Efforts to check the fall increased competition and excess capacity and created more downward pressure on the rate of profit. The experience of one company organized in 1919 to manufacture household appliances, which within four years captured one-quarter of the market, was typical:

“The income of this company increased very rapidly until its market became satisfied and its competitors caught up, and thereby limited sales to a ‘fair share’ of a market rapidly becoming saturated by the efforts of this single manufacturer. In seeking more than a fair share of the available market its production facilities were expanded to a capacity sufficient to produce two-thirds of the annual requirements of the industry. This overcapacity is now a burden on the business, since the relative dollar volume of sales from its plant investment has fallen off on an average of almost 10% annually since 1926 ... Larger profits were secured in 1923 and 1924 than have been earned in recent years on a greater volume of sales ... More and more markets are being saturated by our methods of mass production, and as many of these show signs of becoming limited markets, the tendency toward declining income is broadening to include many well-known and wealthy corporations.” [2]

The tendency of the rate of profit to fall forced efforts to raise profits by reducing costs or increasing output to secure a larger share of markets, or by a combination of both methods. While this always meant greater capacity, it did not always mean greater expenditures on capital equipment. More economical use of raw materials, utilization of waste, and standardization of products increased capacity and output. Or labor was exploited more intensively; one method was the “stretch-out” system, by which one worker tended more machines. In the case of cotton mills, although there was in 1924-29 a net shrinkage in machinery, hours worked per spindle rose from 2,353 to 3,073 by growing use of the double-shift. [3] As these methods increased capacity and output without the buying of new equipment, there was no corresponding development of purchasing power and consumption among the workers producing capital goods. The result was an aggravation of excess capacity and competition.

Productive capacity was, however, augmented mainly by investment in new equipment. Capital was abundant, because of high profits. And credit was abundant, because it is the nature of capitalist production to inflate credit in the prosperity phase of the cycle. Investment in new capital equipment was stimulated by the unusually rapid improvement in technological efficiency, increasing greatly the productivity of labor and the reduction of labor costs. But this meant a higher composition of capital: less variable capital (wages) and more constant capital (equipment and materials), limiting the workers’ purchasing power and consumption. Productive efficiency and output were developed regardless of the relatively limited conditions of mass consumption. The result was an aggravation of excess capacity and competition.

Excess capacity and competition were particularly marked in the newer industries. Their initially large profits and constantly growing markets led to an overexpansion of existing plants and the establishment of new, unnecessary plants by capital seeking profits anywhere, anyhow. “There is no better illustration than the pouring of new capital into the radio-receiving set industry in 1928 and 1929. Some of the pioneers made very large profits which they wasted by investing to increase their output. At the same time the cost of production was lowered a great deal by one maker. In the short space of 18 months the potential production of this industry was increased threefold, to an estimated 15,000,000 sets annually by the end of 1929. Even in that year the whole market absorbed only a little over 4,000,000 sets.” [4] This was generally true of all the newer industries, where an initial high rate of profit was transformed into its opposite, a low, falling rate of profit. The newer industries’ contribution to excess capacity was enlarged by their products competing with older products. The radio competed with the phonograph, rayon with the older textiles, rubber and substitutes with leather, celotex and 21 other products with wood. The result was an aggravation of excess capacity and competition.

The expansion of plant capacity beyond the needs of their own markets led many enterprises to “take up the slack with sidelines.” That is, they added new products to their output. The General Electric Company and the Westinghouse Electric and Manufacturing Company began to make radios ... Two automobile accessories companies went in for the manufacture of radios, and one of them added hardware for good measure ... A radio company began to manufacture electric refrigerators. So did the Savage Arms Company, and it included washing machines ... General Motors added electric refrigerators, radios, dental apparatus, and other products unrelated to automobiles ... The American Car and Foundry Company became manufacturers of motor buses, the Anaconda Copper Company of copper and brass products, the Aluminum Company of America of a whole series of new products ... The American Ice Company, threatened by mechanical refrigeration, dipped into surplus and started a power laundry business ... Another company, manufacturing billiard tables, added phonographs and radios to its output ... This continued during the depression: General Motors began to manufacture gas refrigerators; the Pennsylvania Railroad built a brass foundry, the most efficient of its type. [5] ... Where these “sidelines” meant the use mainly of old equipment they tended to raise the rate of profit, although lowering it for other enterprises; where new equipment was mainly used it tended eventually to lower the rate of profit while raising its mass ... At the same time there was an increase of integration, the combination in one enterprise of different processes or parts of manufacture ... The result of all these efforts to raise the mass of profits and check the fall in the rate was an aggravation of excess capacity and competition.

Excess capacity was enormous. In 1928-29, in spite of the sharp upward spurt in production, most American industries were capable of producing from 25% to 75% more goods than markets could absorb.

The unused portion of excess capacity, ranging up to 75%, was particularly great in the newer industries: radio, automobiles, rayon, chemicals ... Because of the growing use of electric power, more efficient combustion methods, and the higher productivity of labor, coal mining was increasingly tormented by unused capacity ... There was an unused capacity of 15% in paper manufacture, 20% in petroleum refining, 25% to 40% in glassware, 45% in wheat flour, in textiles from 15% in cotton to 40% in silk, and in iron and steel from 5% in steel ingots to 45% in pig iron ... In sugar refining the unused capacity was 100% ... While capacity in the plants of the United States Steel Corporation rose 15%, operations fell from 89% of capacity in 1923 to 87% in 1929, with an average of 82% operation in 1924-29 ... Unused capacity was 28% in Portland Cement mills, 50% in boots and shoes, and 40% in clothing ... In shipbuilding, output fell from 9,472,000 gross tons in 1919-21 to 631,000 gross tons in 1927-29, an indication of tremendous unused capacity ... It amounted to 64.2% in central electric stations. [6] ... Considerable excess capacity existed also in oil and metal production, on the railroads (partly because of bus and motor-truck competition), and in electrical manufacturing.

Where excess capacity was unused, its fixed costs ate into realized profits, forced down the rate of profit and was a perpetual invitation to enlarge output regardless of the limited, saturated condition of markets. Where excess capacity was used, it meant an output of commodities beyond the existing effective demand (in terms of available purchasing power), which aggravated competition and lowered prices to unprofitable levels.

Excess capacity is related, both as cause and effect, to the disproportions always prevailing in capitalist production. Any considerable excess capacity in an industry creates disproportions in its own inner relations and in its outer relations with other industries. Differences in the rate of growth of industries, particularly when new industries develop, create new or intensify old disproportions. There is relative overdevelopment of some and underdevelopment of other industries. One result is instability: competition of industry against industry, more pressure on limited markets, a stronger drive toward overproduction. The disproportions are a result of the planlessness of capitalist production. But the planlessness itself and the disproportions it engenders are an outgrowth of the antagonism between production and consumption: of the greatest of all disproportions, that between the output of capital goods and consumption goods. Capitalist production is a “continual process of disproportionality.” The disproportions change continually; they are not destroyed but “overcome” by disproportions creating new relations and assuming new forms which permit an upward movement of production. This process results in the temporary, unstable equilibrium of prosperity, an equilibrium created and maintained by perpetual changes within itself, temporarily “easing” contradictions. But eventually the accumulating disproportions change in a manner which upsets the equilibrium, and prosperity collapses into depression.

Where prices are not lowered to unprofitable levels by excess capacity and the aggravation of competition, the same result may be indirectly achieved by multiplication of the costs and wastes of distribution. This is a characteristic aspect of capitalist production. Changes in the composition of capital, which increase the productivity of labor, decrease the relative wages of the workers, and thus limit the conditions of consumption. The capitalist is continually reducing labor costs; it never enters his head to raise wages. But this develops an antagonism. Distribution costs mount as a larger mass of commodities are thrown upon relatively smaller markets and competition is aggravated. The part of consumer price represented by distribution costs rose from 30% in 1870 to 55% in 1930. Most of the increase was in selling costs. It cost more in 1922-28 to get a $25 order from a retail grocer than it did in 1902 to get a $75 order. Traveling salesmen rose from 179,320 in 1920 to 223,732 in 1930, or 25%. [7] Instalment selling added greatly to distribution costs. So did advertising. Its devotees justify advertising with all sorts of complex arguments. But they are wrong. The increase in advertising (nearly $2,000 million in 1929) is a direct result of the growing antagonism between production and consumption, of the clash between the expansion of production and the limitation of consumption, with which is involved the problems of excess capacity, mounting overhead costs, aggravated competition, and limited markets. Advertising does not lower prices, it tends to raise them: the purpose of an advertiser is “to lift his product out of competition” and secure more sales and higher prices. In its methods advertising degrades truth, is cynical of mass intelligence, caters to the lowest instincts, and uses fraudulent economics and worse psychology. [1*] That does not worry the capitalist, of course. But there is worry in the fact that distribution costs, including advertising, tend eventually to lower the rate of profit.

Capitalist production saves on labor and multiplies the productive forces. But two contradictions arise which constantly torment capitalist enterprise. Saving on labor decreases relative wages and limits the conditions of consumption. This sets in motion the forces of excess capacity, sharpened competition, and mounting distribution costs. These costs absorb much, if not most, of the saving on labor, and eventually strengthen the downward pressure on the rate of profit. The efforts of capitalist enterprise to escape these manifold contradictions created bedlam:

“American business has gone ‘salesmanship mad’ in the last ten years, due to increasing economic pressure and narrowing net profits, and has utterly overstressed high-pressure personal salesmanship ... A great horde of salesmen is overrunning the country, ‘pepped up’ and trained to the last notch of slick salesmanship. The cost of personal selling has in the meanwhile mounted, and the results per unit of effort have declined. Dealers and consumers alike have been pressed beyond the last degree of decency and good business. The number of commodities on the market and the number of salesmen representing them is now enormous ... The dealers, if they ‘fell’ for the salesmen, would buy 500% to 1000% more goods than they could ever afford – or should be asked – to buy ... They merely pile up the cost of selling and increase waste ... The vast bedlam of salesmanship and salesmen, and the noise of their competitive shrieking, and the annoyance of their unrelenting, almost desperate tracking down of prospects, is growing greater every year ... And the amazing thing is that with all this enormous effort we can sell only 65% of the products that American factories can make.[8]

It was bedlam. “The amazing thing is that with all this enormous effort we can sell only 65% of the products that American factories can make” – while the majority of the people were living at or below subsistence levels! Bedlam – because industry retained in higher profits and distribution wastes what should have gone into mass consuming power. (One part of distribution wastes, it is true, represents wages, hence consuming power; but another part represents salaries and profits whose recipients tend to invest more than they consume.)

Bedlam was styled the “new competition.” One commodity began to compete with all other commodities. Industry competed with industry; an industry, otherwise ruthlessly competing within itself, combined for cooperative competition with other industries to secure “a larger slice of the consumer’s dollar.” Factors formerly cooperating began to compete; where once there was the manufacturer, the wholesaler, and the retailer, now chain stores abolished many wholesalers, manufacturers opened their own stores, and chain stores opened their own manufacturing plants.

The “new competition” was aggravated by more “monopoly competition,” both activated by the tendency of the rate of profit to fall. Monopolist combinations, the large aggregations of corporate capital, competed in the same markets or over the prices of materials (raw and semi-finished) they bought and sold among themselves. Monopolist combinations competed with small producers by capturing their markets or depressing the prices of the semi-finished materials or parts bought from the small producers. It is an essential technique of monopolist combinations to raise the price of goods they sell and depress the price of goods they buy. Thus monopoly, arising out of competition and striving to overcome it, simultaneously intensifies competition as a means of increasing the mass of its profits at the expense of non-monopolist enterprise.

It was bedlam ... Forced to utilize its excess capacity, the petroleum industry wastefully and unprofitably flooded the markets with oil ... Excess capacity in refining led to the multiplication of gasoline retail outlets, which rose to 318,000 in 1929, one to every 83 registered automobiles; the situation was made worse by Shell Union Oil, waging war on all fronts, starting its own chain of gasoline stations ... Natural gas competed with manufactured gas; the competition of electric power made coal a “sick” industry ... Bitter competition among manufacturers of tires led to the sale of tires through company distributing chains, mail-order houses, and service stations ... Manufacturers of products competing with wood spent $22,000,000 through their associations on promotion and selling campaigns against lumber, which retaliated with a campaign of its own ... To meet the competition of rayon the older textiles spent “immense” sums on “consumer advertising,” $750,000 yearly by one company alone ... The National Retail Shoe Dealers Association in 1927 appropriated $4,000,000 for an advertising campaign to sell more shoes on the basis of style and color appeal; the industry was capable of producing three times more shoes than the market was absorbing ... The fall in food consumption, accompanied by increasing productive capacity, led forty different food groups to mobilize and wage war on each other ... Mayonnaise invaded the butter market; at a convention of the Mayonnaise Manufacturers Association a “butterless banquet” was served and a campaign was launched to “popularize mayonnaise among consumers as a substitute for butter.” ... The advertising of a cigarette company, warning against the bad effects of sweets, led to organization of a Sugar Institute which spent millions advertising the merits of sugar ... Appropriations of $300,000 were made by the United States Fisheries Congress, by the Ice Cream Manufacturers Association, and by the Allied Baking Industry to “educate” consumers to buy more of their products in preference to other products ... The market was flooded with 402 brands of dentifrices, whose advertising involved millions of dollars and millions of lies ... The “woman beautiful” had her choice of 2,500 perfumes and nearly as many face powders: one manufacturer advertised: “A face powder for every mood!” ... Automobiles and cigarette advertising reached new high levels in money and new lows in tone ... Drug stores sold 100 more articles than a few years previously; candy was sold in clothing, dairy, dry goods, drug and grocery stores and in delicatessens, bakeries, auto accessory stores and gasoline stations ... As if there were not enough products on the markets, chain stores increased the number of their “private” brands, sales of which rose to $762 million in 1929 ... Chain stores, considered a “rationalization” of distribution and a measurable solution of its problems, aggravated competition and excess capacity. Their pressure forced independents to organize “voluntary chains.” Chain competed with chain, forcing mergers and combinations. The larger chain-store systems demanded and secured price concessions from manufacturers; some chains simply informed manufacturers at what price their goods would be bought. At the same time, chain stores increased their manufacturing activities and plant capacity, competing directly with manufacturers, who met the challenge with mergers and combinations. [9] ... It was, and is, bedlam.

One result was a great increase in instalment selling, and it added to the costs of distribution. In 1929, instalment sales amounted to $6,000 million, or 12% of all retail sales; the amount of instalment debt outstanding at any given moment was from $2,225 million to $2,500 million. [10] Large profits were made by the finance companies dealing in instalment paper, in the creation of artificial purchasing power. Instalment selling undoubtedly stimulated consumption and production, as outstanding instalment credit represents sales which would not have been made for the time being. But instalment selling has obvious limitations as an offset to inadequate consumer purchasing power. To escape the effects of excess capacity and depressed mass consumption, instalment selling must increase progressively and cover industry as a whole. The one is impossible because there are limits in the incomes of instalment buyers, the other is impossible because instalment credit is confined to five or six kinds of durable consumption goods (clothing is an exception, but unimportant). The creation of artificial purchasing power was further limited by its concentration in the newer industries automobiles (one-half of all instalment sales), radios, washing machines, mechanical refrigerators; only two of the older industries, furniture and sewing machines, were substantially represented. In these industries, sales and output were augmented by instalment selling; it quickened and enlarged the growth of new industries, an important factor in prosperity. But the result was overdevelopment, particularly in automobiles and radio. When instalment buying reached its limits, manufacturers were left with an enormous excess capacity. Moreover, instalment consumer credit, unlike producer credit, is not payable out of earnings increased by the credit but out of a constant income. It mortgages future income. This means that eventually, when instalment sales become stationary or fall, new income is used to pay for old goods previously produced and sold and limits demand for new goods. (During depression, when new and outstanding instalment credit falls, instalment payments lessen demand for current consumption goods and make the depression worse.) Instalment selling increases the instability of capitalist production by augmenting output and sales of optional or postponable goods. The industries using instalment selling waged ruthless competitive war upon all other industries for a “larger slice of the consumer’s dollar.” Capitalist production is bedlam.

Bedlam reached its climax in the theory of “progressive obsolescence,” seriously considered by the tormented magnates of industry, finance, and advertising:

“If we are to have increasingly large-scale production there must likewise be increasingly large-scale consumption ... To get more money into the consumers hands with which to buy ... is a mere minor stopgap. There is, however, a far greater and more powerful lever available. I refer to a principle which, for want of a simpler term, I name progressive obsolescence. This means simply the more intensive spreading – among those people who now have buying surplus – of the belief in and practice of buying more goods on the basis of obsolescence in efficiency, economy, style or taste. We must induce people who can afford it to buy a greater variety of goods on the same principle that they now buy automobiles, radios and clothes, namely, buying goods not to wear out, but to trade in or discard after a short time when new or more attractive goods or models come out. The one salvation of American industry, which has a capacity for producing 80% or 100% more goods than are now consumed, is to foster the progressive obsolescence principle, which means buying for up-to-dateness, efficiency and style, buying for change, whim, fancy ... We must either use the fruits of our marvelous factories in this highly efficient ‘power’ age, or slow them down or shut them down.” [11]

This is economic and cultural lunacy, but a lunacy wholly in accord with the social relations of capitalist production. Capitalism must produce and sell goods, but from the standpoint of profit it makes no difference what goods or who buys them.

The lunacy of “progressive obsolescence” was matched by the desperation of proposals to restrict production (now one of the aims of state capitalism). Said the president of the Durham Duplex Razor Company:

“Manufacturing merchandise faster than it can be sold is one of the principal causes of the increase in competition ... We are turning out more merchandise than can be sold profitably ... Business health can only be preserved by maintaining an equilibrium between production and consumer sales.” [12]

Thus was rejected the “principle” that production and prosperity depend upon mass consumption:

In spite of the clamor about “mass consumption” and “mass markets,” the equilibrium of capitalist production came to depend more and more on artificially stimulating the “wants” of small groups of people with an excess of purchasing power (an aspect of the unequal distribution of income). Luxury or variety production, representing consumption of which the workers are deprived, acquired increasing importance. The trade in luxury goods was one of the great stimulating forces in the rise of capitalism, and capitalist production since has increased the output of luxuries more than the necessaries of mass consumption. In 1923-29, the American output of luxury or variety goods rose substantially because of the great rise in dividends and interest, in speculative profits, and in the concentration of income. Conspicuous competitive consumption was never as great, while mass consumption was practically stationary. In its revolutionary youth the bourgeoisie, particularly the Puritans, condemned luxuries, which were hated reminders of feudal privilege and power. But the condemnation was withdrawn after the bourgeoisie became the ruling class. Luxury is a badge of class differentiation and distinction, a ruling class necessity.

Luxury is also an economic necessity in the capitalist system, based upon class exploitation and antagonisms. As mass markets are saturated because of the limited conditions of mass consumption, an increase in production, other than capital goods, comes to depend upon “those people who have buying surplus, who buy for style, change, whim, fancy,” and whose incomes, particularly the speculative, rise steadily during prosperity. Surplus capital to flow into luxury or variety production, where low wages and the lower composition of capital (more variable than constant) yield an exceptionally high rate of profit. This eases the pressure of surplus capital on the rate of profit in other industries. But the high rate of profit in variety production eventually tends to fall, because of excess capacity and competition and because modern luxury production often requires large fixed capital.

Another contradiction arises: as mass production grows, and simultaneously limits mass consumption while augmenting surplus capital and the higher incomes, capitalist industry depends increasingly upon variety production, the opposite of mass production. This contradiction becomes constantly more acute. Its “either or” aspect is thus described by Carl Brinkmann, a conservative German economist who is now a fascist:

“A new epoch seems to put modern civilization before the alternative either of clinging to the capitalist system with higher although less equalized standards of living, or of embarking on a communist planned economy with a primarily equalized although possibly very low standard.” [13]

Thus capitalism, in its decline, offers higher standards to the few and lower standards to the many! In Germany, where capitalist decline is most conspicuous, there is no marked decrease in the output of luxuries but a great decrease in the output of mass necessaries. (The reference to “possibly very low standards” in a communist society is plain special pleading.)

Variety wants, particularly when they are stimulated artificially by high-pressure advertising and are dependent upon speculative profits, intensify the instability of production and prosperity. Another factor of instability was the increase in the output of durable consumption goods, whose buyers include workers and farmers, and which are of the optional or postponable type. [2*] The output of these goods falls immediately and severely as prosperity sags, accelerating cyclical breakdown and aggravating depression.

Luxury or variety buying was enormously stimulated by the profits of speculation. Speculative profits shot upward in 1925 (Table III), precisely when the output of luxury goods and durable goods began to mount most rapidly. Thus, in spite of all the talk of “prosperity is mass consumption,” from 1925 on, consumption and prosperity increasingly depended on the artificial purchasing power created by instalment credit and speculative profits.

Growth of Speculative Profits, 1925-29









































* Not available.
Source: Speculative profits computed from Bureau of Internal Revenue, Statistics of Income for the respective years. Speculative profits are realized profits reported by income-taxpayers from sale of stocks, bonds, and real estate, and capital net gains from sale of assets held more than two years. Speculative profits of banks and other corporations, which helped to swell dividends, are not included. While capital gains are not directly speculative profits, they mainly are indirectly, as capital gains are largest and most realized upon when values are inflated by speculation.

The upflare of stock-market speculation was preceded in 1923-24 by speculation in real estate, particularly the Florida “boom,” capitalizing urban growth and greatly inflating values. (Inflation of land values, which goes on continuously, is partly responsible for the miserable housing of the workers.) Stock speculation rose in 1925 and surged upward in 1928-29, when speculative profits were four times those of 1923. For the seven years 1923-29, speculative profits amounted to $20,380 million. They rose five times as much as dividend and interest payments and twenty times as much as wages.

“Having no origin in the manufacture or sale of goods or services, having no immediate purpose to produce goods or services, speculative profits may properly be designated as artificial increments to income. In the period 1927 to 1929 they served to keep consumer demand ahead of production ... A potential source of spendable income so vast as this would not need to be drawn upon to more than one-fourth of its maximum capacity to provide under stable price conditions an addition to consumer purchasing power unprecedented for so short a period ... Speculators usually regarded profits as definitely so much ‘money made,’ and governed their spendings accordingly ... The inference is exceedingly strong that the major influence prolonging the last prosperity through its final two years was the enormous stream of purchasing power coming from the security markets.” [14]

Security speculation was never so frenzied. Prices of industrial common stocks rose an average of 19.4% yearly in 1922-29 compared with 2.8% in 1901-13; the “values” of stocks on the New York Stock Exchange rose from $38,500 million on January 1, 1927 to $59,330 million on October 1, 1928 and to $89,670 million on September 1, 1929, a gain of $40,000 million after deducting new issues. [15] Speculative profits reported by income-taxpayers rose from $2,311 million in 1918-20 to $12,385 million in 1927-29. If to brokers’ loans on the New York Exchange, which rose from $3,219 million on April 30, 1926 to $8,549 million on September 30, 1929, are added margins, the total tied up in speculation at its peak was over $11,500 million, and over $15,000 million if all stock exchanges are included. The commissions of brokers of the New York Exchange in 1928 amounted to over $400 million, or an average of $365,000 for each of the 1,100 members [16] (in addition to speculative profits of their own). Speculation was a major industry. Banks and other financial interests tied up with the speculative fraternity easily beat down the mild efforts to “normalize” speculation. “The sky’s the limit!” Leading stocks sold at from twenty-one to fourty-four times their earnings. [17] Stocks sold at yields of less than 3% or 1% or nothing – discounting not only the future but eternity itself.

The speculative fever was inflamed by manipulation, trickery, and downright swindle, by all the institutional arrangements of capitalism ... Investment “analysts” advised: “There are laws governing investment and speculation just as there are laws governing the universe. Conform to these laws and you reap just rewards. Ignore them, either wilfully or through ignorance, and you lose.” ... Halsey, Stuart and Company hired at $50 weekly a University of Chicago professor to act as Old Counselor in their radio hour, to broadcast material prepared by the brokerage firm. [18] ... Executives of banks and other corporations formed pools in the stocks of their own concerns ... Corporations split up stocks to inflame the public’s speculative hopes ... A flood of wholly speculative security issues was unloosed ... Scores of “trading companies,” disguised as investment trusts, were organized to speculate in stocks ... A whole series of mergers promoted speculative purposes ... Investment trusts, practically non-existent in 1925 but whose resources by 1929 exceeded $3,000 million [19], inflamed the speculative fever by their rapid expansion, their purchase of stocks and issuance of new securities, their buying on “dips” in the market, their absorption of new speculative issues, and their connection with brokerage houses ... Speculation yielded higher profits than production; corporations whose surplus rose greatly, much of it in cash, placed billions in brokers’ loans ... European money flowed into American speculative markets; French speculators “cleaned up” $307,000,000 in fifteen months in 1928-29. [20] ... Banks manufactured speculative credit with the abandon of bankrupt governments issuing paper money, while their security affiliates speculated on a large scale; speculation and credit are linked together, an inseparable part of capitalist accumulation ... The speculative fever was inflamed by the Coolidge-Hoover administrations, and particularly by Secretary of the Treasury Andrew Mellon, with his reductions of the surtax on large incomes, his refunds of personal and corporate income-tax payments, and his influence on Federal Reserve policy ... It was also inflamed by vulgar economists who spoke as if speculation and its jargon are the source of all values. [3*] ... One of them wrote a whole book denouncing efforts to “moderate” speculation; among other passages of cheap eloquence and worse economics was this: “With marked progress in individual industries, in an era of radical improvement in our economic life comparable to the industrial revolution, attended by singular good fortune in the expansion of foreign trade and achieving a dominant place in the firmament of international commerce and finance, with peace at home and abroad and with an administration in which the country has the greatest confidence, it is little wonder that those who buy stocks, who in terms of the economist are paying a present sum for an infinite series of future incomes, should be inclined to pay a rather high price.” [21] Irving Fisher, professor of economics, a day or two before the market crash in October, 1929, said prices were not high but low, “gains are continuing into the future” and “predictions of heavy reaction find little if any foundation in fact.” Several weeks after the crash he said it had created “false fear” and meant “no permanent ill effects.” [22] ... The “New Era” prophets rejected economic laws; after the crash, ruining the hopes of “an infinite series of future incomes,” the economist of the Guaranty Trust Company, a Morgan bank, admitted sadly: “It is evident that economic laws have resumed their sway in important particulars”! [23]

[Diagram 8: The Stakes of Speculation 1923-29]

The fever seized upon widening circles of speculators. This was magnified by the profiteers of prosperity, who insisted “everybody” was speculating – bootblacks, clerks, and millionaires, poor man, rich man, beggar man, thief. But millions of shares are not millions of speculators. Two New York Stock Exchange firms, doing more than 10% of the Exchange’s total business, had fewer than 12,000 active margin accounts. [24] In 1928 (the most representative year, as there was no crash), 470,889 out of 4,070,851 income-taxpayers reported profits from the sale of stocks, bonds, and real-estate, another 27,704 reported capital net gains, and 72,829 reported speculative losses. [25] The total is 571,422 persons, not all of whom were necessarily active speculators, offset by others who did not report. In all probability the number of speculators was 750,000, and definitely not over 1,000,000. This in itself was an enormous increase over pre-war years. Speculation aroused get-rich-quick appetites, but the new speculators were mainly from the middle class, which was becoming larger and wealthier. The limited class character of speculation is clearly indicated in the distribution of speculative profits (Table IV). Income-taxpayers with incomes below $3,000 yearly, mainly of the lower bourgeoisie, with a sprinkling of better-paid skilled workers and farmers, received only 4.6% of speculative profits. These petty speculators lost more than they gained: speculation, directly and indirectly, expropriates small savers and investors, redistributes wealth, and accelerates the concentration of capital. Speculators of the intermediate bourgeoisie or upper middle class (incomes of $3,000 to $10,000) “earned” substantial profits: $4,920 million, or 16.2% of the total. But the real profits were secured by the upper bourgeoisie: a total of $24,064 million, of which $8,000 million was “earned” in the two years 1928-29. As in 1929 there were only 382,241 individuals reporting incomes of 10,000 and over, not all of whom were active speculators, the gains of speculation were concentrated in a handful of people. Incomes below $3,000 were barred from making any substantial profits, except on a fluke, because they did not have money for large-scale speculation; and most of them were plucked. A few of them made enough profits to rise to the $5,000 class, many more rose from the $5,000 to the $10,000 class, while speculators with incomes of $10,000 and over secured the largest profits and rose to the higher income classes, particularly the highest: the number of millionaires tripled, mainly as a result of accumulating speculative profits.

Distribution of Speculative Profits, 1918-29




Below $3,000






Over $10,000






Source: Computed from Bureau of Internal Revenue, Statistics of Income for the respective years.

Speculation depends, in final analysis, upon the exploitation of the producers. The wages of the workers (and farmers’ income) were depressed relatively to profits. There was a decidedly more unequal distribution and concentration of income, whose distribution favored the investing and speculating classes, including the new middle class of supervisory, managerial, and merchandising employees in corporate industry. According to an apologetic economist: “The demand for stocks varies directly with the surplus cash the people of the country have after they have paid all living and business expenses and the cost of ordinary construction and improvements. The stock market has been high recently because the income of the people has been large.” [26] But what are the implications? “Surplus cash” was high not because “the income of the people” was large, but because of the unequal distribution and concentration of income; there was not much “surplus cash” among workers and farmers. If, and this is inconceivable under capitalism, the increase in the national income had gone to the lower-paid workers and poorer farmers for use in consumption, the larger incomes would have acquired no “surplus cash” with which to finance their speculative spree. Much of the money tied up in speculation, moreover, was not new income but money secured from loans on stocks and other forms of property: an aspect of the concentration of wealth. Apologetic economists always insist on “analyzing” gross totals and general trends instead of class proportions and relatives ...

Speculation capitalized the rising productivity of labor and its higher yield of surplus value. It was bound up with all the results of changes in the composition of capital. The superabundance of capital simultaneously increased excess capacity and inflamed speculation. Although the general rate of profit was falling, many corporations experienced a rising rate; speculation in their stocks affected other stocks. The falling rate of profit drove capital after the higher profits of speculation. This included corporations with a large cash surplus; their profits were augmented by the high returns on brokers’ loans, nearly one-third of which was financed by corporations.

Underlying all these forces was the antagonism between production and consumption, which depressing mass consumption and breeding a superabundance of capital. Superabundant capital became more and more aggressive and adventurous in its search for investment and profits, overflowing into risky enterprises and speculation. Speculation seized upon technical changes and new industries, which were introduced planlessly, regardless of the requirements of industry as a whole. Large profits were made by simple speculative manipulation. In one case a small group bought control of the stock of a railroad and sold it to the Pennroad Corporation, a holding company of the Pennsylvania Railroad, for $37,898,000: the profit was $12,807,000. [27] The fall in the rate of profit stimulated mergers and combinations, which grew unprecedentedly in 1923-29. Mergers and combinations tried to check the fall in the rate of profit by control of production and prices; but as they were enormously overcapitalized and increased excess capacity, the final result was to strengthen the tendency of the rate of profit to fall. Mergers and combination became the objects of speculation; they yielded huge promoter’s profits and inflamed speculative hopes.

Monopolist combinations interlock with the great banks; there is a fusion of financial and industrial capital. The financial oligarchy strengthens its control over industry. Ownership increasingly becomes a mass of paper claims upon production and income, the means and objects of speculation, creating the illusion that paper values are the source of all wealth. In the epoch of monopoly capitalism, which in 1923-29 consolidated its hegemony in the United States and is bound up with the decline of capitalism, speculation becomes more active. The financial oligarchy operates with the mass of paper claims and increasingly subordinates the production of goods to the production of speculative profits. It subjects whole industries to predatory speculation and plunder (Insull, Kreuger). Where the profits of non-financial corporations were only 14% higher in 1929 than in 1923, the profits of financial corporations were 177% higher. The financial oligarchy is necessarily and intimately identified with the banks and their financing of speculation, with the stock exchanges, with all the speculative and adventurous aspects of capitalist enterprise. Through the export of capital, a means of checking the fall in the rate of profit, speculation becomes international, encouraged by the financial overlords of monopoly capitalism.

Speculative profits, although they are an artificial creation of income, constitute real claims upon production and goods, upon the labor of the workers and farmers. In the final outcome, when inflated values crash, past speculative profits become present and future losses, and result in a restriction of consumption. But before the crash, speculative profits promote prosperity to the extent that they are spent on consumption goods (and services). Speculation, however, simultaneously aggravates the instability of prosperity and of capitalist production. In this, speculation resembles excess capacity, which as it grows stimulates the demand for capital goods and thus promotes prosperity, although it also contributes to the ultimate breakdown of prosperity because it intensifies competition, lowers the rate of profit, and eventually limits the demand for capital goods. Primarily an effect, speculation reacts and becomes itself a cause. By inflating values, speculation puts pressure on corporate managements to raise profits, and tends to increase competition, excess capacity, and over-production. Speculation encourages risky enterprises, augments the concentration of income, strengthens the adventurous character of finance capital, and makes the unstable equilibrium of capitalist prosperity constantly more unstable because of an increasing dependence upon luxury production.


1*. “Every human being has a vote every time he makes a purchase. No one is disfranchised ... Every day is election day.” W.T. Foster and Waddill Catchings, Profits (1928), p. 133. This “democracy of the consumer” is as limited as bourgeois democracy in general. The consumer’s freedom of choice is enormously limited by the pressure of advertising, whose job it is to make customers; it is still more limited by income. Only the rich enjoy this democracy, as only they really enjoy other forms of bourgeois democracy.

2*. There is a similar development in England and all more highly industrial countries. “The demand for goods satisfying secondary needs ... must increase the difficulty of balancing consumption and productive capacity ... Instability of demand through causes of this kind is associated with rising incomes rather than with incomes at a higher level ... But there seems no great possibility of a continuous rise in income.” G.C. Allen, British Industries and Their Organization (1933), pp.288-89. These are the desperate economics of the decline of capitalism. Stationary mass incomes and economic stagnation, lower mass standards of living, are to “assure” the stability of production!

3*. Speculators and financiers are modern medicine-men, who make a fetish of their jargon and endow it with magical powers. After two years of declining stock prices it was suggested, to end the depression, that the market vocabulary abolish such phrases as “selling climaxes,” “resistance point” and “technical rally” as “tending to intensify the bearish pessimism of the financial community.” See New York Times, November 25, 1931.


1. Editorial, Annalist, July 16, 1926, p.68.

2. W.W. Hay, Manufacturing of New Products an Escape from Effects of Saturated Markets, Annalist, December 12, 1930.

3. C.T. Murchison, Requisites of Stabilization in the Cotton Textile Industry, American Economic Review, Supplement, March 1933, p.72.

4. W.W. Hay, Plant Overexpansion As a Logical Result of the Industrial Recovery Act, Annalist, July 28, 1933, p.115.

5. Taking up the Slack with Sidelines, Literary Digest, June 12, 1926, p.84; New York Times, September 19, 1931; Iron Age, December 22, 1932, p.956.

6. New York Times, November 1, 1931; R.F. Martin, Industrial Overcapacity, Bulletin of the Taylor Society, June 1932, pp.96-99; C.E. Fraser and G.E. Doriot, Analyzing Our Industries (1932), p.253; Statistical Abstract, 1931, p.457; Sumner H. Slichter, Modern Economic Society (1931), pp.5-6; Walter N. Polakov, The Power Age (1933), p.82.

7. New York Times, September 11, 1932; New York Journal of Commerce, January 3, 1928; Statistical Abstract, 1932, p.58.

8. J. George Frederick, president of the Business Bourse, What Price Super-Selling, Advertising and Selling, January 25, 1928, pp.19-20.

9. G.W. Stocking, Oil Industry, Encyclopedia of the Social Sciences, v.XI, p.442; M. Thorpe, The Business Revolution of 1927-37, Nation’s Business, March, 1927, p.27; New York Journal of Commerce, March 23, 1926; Printers Ink, May 23, 1929, p.133; New York Journal of Commerce, November 1, 1929; Sugar Institute Starts National Advertising Campaign, Printers Ink, February 21, 1929, p.57; J. George Frederick, What Price Super-Selling, Advertising and Selling, January 25, 1928, p.20; George Mansfield, How Long Will Luxuries Stay on Top, Advertising and Selling, January 29, 1929, p.22; Candy, a Billion Dollar Muddle, Nation’s Business, August, 1927, p.17; Editorial, The Chain Stores Wield the Big Stick, Advertising and Selling, July 25, 1928, p.29; New York Times, September 26, 1932.

10. W.C. Plummer, Instalment Selling, Encyclopedia of the Social Sciences, v.VIII, p.75.

11. J. George Frederick, Is Progressive Obsolescence the Path Toward Increased Consumption, Advertising and Selling, September 5, 1928, pp.19-20.

12. Thomas C. Sheehan, Must We Limit Production, The Magazine of Business, February 1928, p.152.

13. Carl Brinkmann, Luxury, Encyclopedia of the Social Sciences, v.IX (1933), p.636.

14. C.T. Murchison, Business Activity Upheld by Stock Market Gains, Annalist, September 9, 1932, p.333.

15. Frederick C. Mills, Economic Tendencies in the United States (1932), p.xvii; Commercial and Financial Chronicle, October 5, 1929, p.2137.

16. New York Evening Post, October 10, 1929; Department of Commerce, Statistical Abstract, 1931, p.319.

17. Annalist, April 7, 1931.

18. Investment Research Bureau, Making Money in Stocks (1928), p.7; New York World-Telegram, February 20, 1933.

19. Leland Rex Robinson, Investment Trusts, Encyclopedia of the Social Sciences, v.VIII (1932), p.280.

20. Bonn, The Crisis of Capitalism, p.123.

21. Joseph Stagg Lawrence, Wall Street or Washington? (1929), p.26.

22. New York Times, October 22, 1929; December 3, 1929.

23. Guaranty Trust Company, Guaranty Survey, December 30, 1929, p.1.

24. New York Journal of Commerce, June 16, 1928.

25. Bureau of Internal Revenue, Statistics of Income, 1928, pp.11-13.

26. Paul Clay, Economic Outlook for 1929, Journal of the American Statistical Association, June 1929, p.182.

27. New York Times, July 7, 1933.


Last updated on 29.9.2007