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Neil Faulkner

The Great Depression: lessons from the past

(4 December 2011)

Published online by Counterfire, 4 December 2011.
Copied with thanks from the Counterfire Website. Also available here: Critical Reading blog, Socialist Worker Website, 7 December.
Marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

Neil Faulkner, author of A Marxist History of the World, compares the crisis today with that of the 1930s.

Great Depression: then and now

Image from the first Great Depression
and more recent times

We have entered the Second Great Depression. Con-Dem Chancellor George Osborne has announced policies amounting to a decade of austerity, 20% cuts in living standards, and more than three million on the dole.

And that is without another financial crash. Yet the Eurozone continues to hover on the brink of the abyss, the centre of the storm having moved from the small peripheral economies of Ireland, Portugal, and Greece to the third biggest in Europe.

Borrowing costs for the Italian state are now at unsustainable levels. The new government is a bankers’ dictatorship committed to austerity, deflation, and an economic death-spiral. Italy is too big to fail – state bankruptcy would bring down the entire European banking system. Yet it is also too big to bail out – the ‘troika’ of EU, IMF, and European Central Bank simply do not have the funds.

The scale of the crisis is without parallel: it is, quite simply, the most serious economic crisis in the history of capitalism. But its general character bears comparison with two previous great depressions. What lessons can we learn?

A sick and ageing system

Karl Marx: theorist of a crisis-ridden
capitalist system

Capitalism has been riddled with contradictions since its inception. These contradictions have become more intractable as the system has aged. The crises of the system tend to become more serious over time.

The reason for this is the growing centralisation and concentration of capital. Centralisation occurs when capital is controlled by a handful of giant corporations, concentration when work is organised in huge complexes like factories and refineries, airports and railways, call-centres and out-of-town shopping malls. These two processes are, of course, closely linked in the development of capitalism.

Centralisation and concentration of capital are driven by competition. Small units cannot afford expensive investments in plant and machinery. They cannot achieve economies of scale through mass production. Therefore they cannot match the lower prices of big firms. They either go out of business altogether or they are gobbled up by larger competitors.

The great boom of Marx’s day, which lasted from 1848 to 1873, was characterised by the competition of many small and medium-sized firms operating largely within a domestic market.

There were crises. These are as natural to capitalism as breathing is to an animal. Because economic development is competitive rather than planned, investment is blind. When the market is looking up, everyone invests to get a slice of the profit. Supply races ahead of demand.

Suddenly, the market is saturated. Warehouses are full of unsold goods. Factories stand idle. Firms go bankrupt. Unemployment soars.

Then, as competitors are wiped out and prices collapse, the survivors discover that they can buy up old plant at fire-sale discounts, hire labour at rock-bottom wages, and expand into a market where demand now exceeds supply.

The crisis is the violent mechanism by which an anarchic system regulates itself. Or it used to be.

The Long Depression

Crisis has another effect. It speeds up the centralisation and concentration of capital. The smaller firms with higher unit costs go under. The more competitive big firms expand to fill the gap. During a boom, there is enough to sustain even the weak. During a bust, competition intensifies, and only the strong survive.

The boom of the mid 19th century was probably the last occasion when the crisis mechanism operated effectively. Since then, the average size of units of capital has made the periodic crises of the system potentially intractable. The violent breathing of a monstrous system has been transformed into a succession of racking fevers of life-threatening intensity.

The financial crash of 1873 plunged the world into what has sometimes been called ‘the Long Depression’. The world economy continued to grow between 1873 and 1896, but at a much slower pace than during the preceding boom.

What lifted the system again was state arms-expenditure. Economic competition during the downturn fed into imperialist rivalry and international tension. The fast-growing German economy overtook the older British economy. Germany became a threat to British naval supremacy and the security of the British Empire.

Krupp steelworks and arms factories

The Krupp complex of steelworks and arms factories

Industry boomed on state orders to supply mass conscript armies, modern artillery, and fleets of dreadnought battleships. The Krupp complex of steelworks and arms factories at Essen in the German Ruhr, for example, employed 16,000 workers in 1873, 45,000 in 1900, and 70,000 in 1912.

The tensions exploded in 1914. Conflict between the great powers produced a four-year industrialised world war which killed 10 million people.

The war was caused by imperialist competition between rival capitalist nation-states. The belligerents aimed at a re-division of the world in their own interests. The carnage of the trenches was a measure of the pathological character of the economic system.

The Roaring Twenties

State arms-expenditure was cut to a fraction of wartime levels after 1918. The result was mass unemployment. The system was incapable of an orderly resumption of civilian production. The market turned out not to be ‘self-regulating’.

Growth was patchy and modest during the ‘Roaring Twenties’. Unemployment never fell below one million in Britain in the interwar years. Wage cuts in the pits provoked a six-month miners’ strike and a nine-day General Strike in 1926. War reparations prostrated the German economy in the early 1920s, and hyperinflation wiped out the value of savings in 1923.

The French economy was buoyed up by German war reparations, the US economy by war-loan repayments and a policy of ‘easy money’ (cheap credit due to low interest rates). The US economy boomed for a decade.

Ordinary homes were supplied with electric power. Middle-class families acquired telephones, radios, gramophones, vacuum-cleaners, and refrigerators. Millions went to the cinema each week. Cars ceased to be a luxury and became mass-market commodities.

But the ‘American Dream’ was a will-o’-the-wisp. A central contradiction of capitalism is that it imposes low wages in the workplace, but requires high spending in the marketplace.

You cannot have both. The one involves squeezing wages to reduce costs and raise profits. But then workers cannot afford to buy back the goods that their collective labour has produced.

But if wages are raised and profits cut, capitalists have no incentive to invest. The search for profit powers the system.

In America’s Roaring Twenties, farm incomes were depressed and wages did not rise. Demand in the ‘real economy’ was therefore depressed. Industrial investment was in consequence too sluggish to absorb the surplus capital with which the system was awash.

So it flowed into speculation. Specifically, it fed a self-sustaining speculative bubble on the Wall Street Stock Exchange.

The bubble

Depiction of the South Sea Bubble

A depiction of the South Sea Bubble, by Edward Matthew Ward

Financial bubbles are as old as capitalism. There was a bubble of speculation in tulip production in early 17th century Holland (‘Tulipmania’), and a bubble of speculation in colonial investment in early 18th century England (‘the South Sea Bubble’). The Long Depression of 1873–1896 had begun with a financial crash following a speculative boom. But – until 2008 – the greatest crash by far was that of 1929.

The way a bubble works is simple. If demand for a paper asset is high enough, its price will rise. If the price of an asset is rising, more investors will want to buy it, hoping to profit from further rises when they re-sell.

If there is enough surplus capital around, and if paper assets keep rising in price because of high demand, take-off becomes possible: assets continue to rise in price simply because more and more investors want to buy them – irrespective of the relationship between their price and the actual value of the goods or services represented.

Paper assets are essentially loans of money in return for titles to ownership. They can be corporate shares, government bonds, insurance policies, currency holdings, bundles of mortgages, advance purchases of commodities, and many other things. The ‘financial services industry’ is very inventive in this respect.

The ‘normal’ return on capital is a share in the profits of the real economy. A ‘speculative’ return arises when the link between the price of paper assets and the value of actual commodities has broken down. Price rises become self-sustaining and stratospheric in a frenzy of ‘get rich quick’ buying and selling.

The frenzy

Global debt increased by about 50% during the 1920s. This is one measure of the creation of ‘fictitious capital’. Whole new classes of ‘holding companies’ and ‘investment trusts’ were created.

These companies produced nothing. They simply traded in the stock of other companies. Often enough, the companies they invested in would be other holding companies and investment trusts. Sometimes the layers of fictitious capital could be five or ten deep.

The Goldman Sachs Trading Corporation was an example. It was formed on 4 December 1928. It issued an initial $100 million of stock, 90% of it sold direct to the general public. With this initial capital, it invested in the stock of other companies.

In February 1929, Goldman Sachs merged with another investment trust. Assets were now valued at $235 million. In July, the joint enterprise launched the Shenandoah Corporation. When it offered $102 million of stock for sale, the issue was oversubscribed sevenfold. No-one wanted to miss out on the money-for-nothing miracle that was Goldman Sachs. The company duly obliged and issued yet more stock.

As the frenzy mounted, capital was sucked out of foreign loans, industrial investment, and infrastructure projects. Nothing was as profitable as speculation on Wall Street. Loose money and a weak economy gave rise to a massive imbalance between the price of paper assets and the value of real commodities.

In industrial crises, blind competition leads to over-investment in production, a glut of commodities, and a wave of factory closures. In financial crises, it leads to a speculative bubble of inflated asset-prices and fictitious capital, followed by a crash, a black-hole of bad debt, and a wave of banking collapses.

The 1929 Crash

On ‘Black Thursday’, 24 October 1929, the Wall Street Stock Exchange fell by almost a third. Thousands of finance-capitalists were wiped out. Millions of ordinary people lost their savings.

Once it started, the crash, like the bubble, was self-sustaining. Just as rising prices had sucked speculative capital into the vortex, now collapsing prices generated a stampede to sell, to ‘liquidate’ capital, to withdraw it from the market before it lost more value.

Wall Street Crash

The Wall Street Crash

And as investors’ positions collapsed, debts were called in to pay other debts, further feeding the reverse frenzy of selling and falling prices. The whole complex weave of financial obligations was suddenly unravelling.

The value of shares in the Shenandoah Corporation had peaked at $36. They eventually went down to 50 cents. Goldman Sachs Trading Corporation stocks had hit $222.50. Two years later, you could buy them for a dollar or two.

The crash did not come from nowhere. Agriculture had been depressed since 1927, and industry was afflicted by a classic cyclical downturn due to over-expansion and under-consumption during the spring and summer of 1929.

The agricultural and industrial crisis triggered the financial crash. But the crash then fed back into the real economy, collapsing credit, drying up loans, choking off investment, shrinking demand.

The centralisation and concentration of capital magnified the scale of the crisis. When a small or medium-sized firm is bankrupted, the overall impact is limited, and many others remain. When a major bank or industrial corporation is bankrupted, it pulls many others down with it, sending a deflationary wave across the wider economy.

So it was now. By 1933, 9,000 US banks had failed, industrial production was down by a third, and one in four workers was unemployed. Nor was there the slightest sign of any recovery. The system was dead in the water.

The Great Depression: deflation and dictatorship

Government policies were worse than useless. They made the crisis deeper and more intractable.

US President Herbert Hoover was obsessed with ‘sound money’ and ‘a balanced budget’. His Secretary of the Treasury’s remedy was to ‘liquidate labour, liquidate stocks, liquidate the farmers ...’ The aim was to shore up finance capital at the expense of the working class. And the effect was to drive the economy deeper into crisis.


Paving he way for Hitler:
German Chancellor Heinrich Brüning

Governments also devalued their currencies to make their own exports cheaper, while imposing tariffs on imports to make them more expensive. But protectionism is a competitive process. When rival states followed suit, the world economy was locked into a race to the bottom, with falling prices and shrinking markets leading to a catastrophic collapse in international trade.

Deflation and protectionism, on top of the economic downturn and the financial crash, destroyed any possibility of recovery.

Democracy, moreover, was soon under attack as hard-right regimes drove through cuts in the face of mass resistance.

German Chancellor Brüning’s response to the crash was to cut wages, cut salaries, cut prices, and raise taxes. He did this at a time when one in four German workers was unemployed.

Brüning did not survive. The depth of the economic crisis and the polarisation of German society paralysed the political system. After Brüning, President Hindenburg appointed a rapid succession of chancellors: von Papen, Schleicher, then Hitler.

None commanded a parliamentary majority. German chancellors ruled by emergency decree. Democracy ceased to operate in Germany from 1930 onwards. After January 1933, its very possibility was destroyed by the Nazi dictatorship.

Across Europe, the centre collapsed, and politics became polarised between revolutionary movements of the working class and counter-revolutionary fascist movements of the middle class. The choice became socialism or barbarism.

In Spain, between 1936 and 1939, that choice took the form of full-scale civil war. The defeat of the Spanish Revolution sealed the victory of fascist dictatorship and plunged the world into war.

The Great Depression ended with the barbarism of Stalingrad, Auschwitz, Hiroshima, and 60 million dead.

The Second Great Depression

Our rulers have learnt nothing from the 1930s. They are repeating the mistakes that made the Great Depression so long and so deep.


John Maynard Keynes

The effect of austerity is to deepen the downturn, increase the deficits, and worsen the debt-load that is dragging down the global economy. That is one of the key lessons of the 1930s.

This reality was the basis of the ‘Keynesian Revolution’. John Maynard Keynes (1883–1946) was a brilliant liberal economist. His masterwork, The General Theory of Employment, Interest, and Money (1936), proved that markets are not self-regulating and that an ‘underemployment equilibrium’ – as in the 1920s and 1930s – was entirely possible.

Keynes was a defender of capitalism. His aim was to save the system from itself. He argued that the only way to do this was for governments to borrow and spend as a way of stimulating economic growth during a downturn.

The logic of Keynesianism is, however, far more radical than Keynes himself was prepared to contemplate. Starting within the framework of classical economics, Keynes proved that the system does not work: that it is riddled with contradictions and has an in-built tendency to catastrophic collapse.

Keynesianism was a product of the Great Depression: a revolution in economic thought brought about by the inability of classical economics (or what is now called ‘neoliberalism’) to explain the crisis or provide plausible solutions.

It amounted to a demonstration that classical economics was false – an ideology to justify the greed of the rich rather than a scientific attempt to explain the world. That is why it remains so controversial. That is why today’s neoliberal political and business elite ignore its insights.

If we fail to learn the lessons of the 1930s, we are likely to pay a terrible price. We have no choice but to build mass movements of resistance from below as a matter of extreme historical urgency. Our aim must be nothing less than to end the rule of finance capital and take democratic control of the economic resources of humanity.

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