From The Militant, Vol. V No. 26 (Whole No. 122), 25 June 1932, pp. 1 & 4.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).
The American government is proceeding full blast in developing its “reconstruction” program to “break the backbone of the depression”. It solicits the support of bankers and industrialists. The program is epitomized by the national policy of credit expansion aiming at “releasing hundreds of millions of dollars in credits to start the wheels of industry turning.”
So far two main measures have been taken; (1) the loans advanced by the Reconstruction Finance Corporation and (2) the release of funds by open market buying of government securities by the Federal Reserve Banks. About $1,000,000,000 in financial resources has been mobilized and set in circulation by these measures. But, as one financier laconically remarked: “Nevertheless, credit has not gone into productive channels, loans advanced by the member banks are showing marked declines.” Credit System During Crisis
It is well to stop at this point for a moment to pose the essential question: How does the credit system operate during a crisis?
When the process of reproduction flows “normally” credits are stable and continually expand. When a stoppage in this flow occurs, due to delayed returns and overstocking of markets, there is a superabundance of capital, of productive capital available; but, in a form in which it cannot perform its function. It is a mass of commodity capital which is unsaleable because of its very superabundance. It is a mass of fixed capital which remains unused because the very process of reproduction is at a standstill. Witness today the enormous production capacity of American industry, now not utilized, and with it the millions strong army of unemployed workers. In such a situation credit is contracted for good and sufficient reasons. Firstly, because this capital remains unemployed. Secondly, because the confidence in the continuity of the process of reproduction is shaken and thirdly, because the demand for this kind of commercial credits decreases. Those manufacturers who curtail, or cease production because they have lots of unsold goods on hand, or at least lack demand for their goods, do not need to buy on credit.
It is not a case of there being no need of loan capital. There is such a need. But loan capital performs one distinct function during the upward curve of the production cycle, and an entirely different one during the crisis. During the upward curve, loan capital is in demand for the purpose of being transformed into productive capital. During the upward curve, loan capital is in demand for the purpose of being transformed into productive capital. During the crisis bills of exchange continue to press for conversion into cash. But the majority of the bills represent actual sales and purchases, which, to make matters worse, have been extended far beyond the demands of society.
In times of crisis the demand for loan capital reaches its maximum. But the borrowing is done for the purpose of paying in order to settle previously contracted obligations. In this manner, the loan capital wanders right back to the banks in settlement of interests and maturities. The rate of profit, and with it, the demand for industrial capital have almost reached the vanishing point.
It is therefore no wonder that the loans advanced by the Reconstruction Finance Corporation, to the tune of more than one half billion dollars today, with but two small exceptions, all went to meet obligations of principal or interest. The two exceptions were a $27,500,000 to the Pennsylvania Railroad, and a $4,399,000 loan to New York Central Railroad, both of which are claimed to be for purposes of reconstruction. From the other category of loans we will mention only one instance, that of $32,500,000 to the Baltimore and Ohio Railroad, advanced solely for the meeting of outstanding obligations of the company.
Surely, the credit expansion policy is developing full blast. The bankers and industrialists are being taken care of. For the latter the maturing bills are being met and for the former the bills of exchange are being converted into cash. But – the wheels of industry are not turning.
Will the “ingenious” proposal offered by the Young Committee of bankers and industrialists have better prospects of success? We recall that much ado was made out of the creation of this committee and its prospective aid in the “reconstruction” program. By its make up, the committee alone was said to represent aggregate capital resources of about $18,000,000,000. Now the committee has labored; and here is what it proposes: There are so many hundreds of thousands of small home owners who have mortgage obligations which, during these hard times, it becomes doubly hard to meet. And that is the grand idea of the committee, to facilitate the advancing of loans for such purposes. It is not so much to make sure that the small home owner keeps his home. No, the bankers do not want to have too much real-estate on their hands. But meeting these mortgage obligations enables the banks to keep their dividends in shape. Of course, – this will not start the wheels of industry turning either.
How do matters then stand with the second measure of the credit expansion scheme? During the period of accelerated buying, or taking over, of government securities by the Federal Reserve Banks, between April 13 and May 18, a total of $480,000,000 were released. This operation is now said to have “arrested the catastrophic decline in bank credits in progress since last July.” But loans and investments made by all the member banks throughout the country continue to lag nevertheless.
With these huge funds made available, the problem still remained one of finding ways and means for putting them to work. The dilemma is, what to do with the credits available – with the expanded credits. Where are the markets for profitable investments? This is the question asked by the perturbed financiers; and the cruel answer is: The market for which capitalism produces has become severely contracted!
The National City Bank of New York in its monthly letter of June bewails the present situation in the following terms:
“Never has there been a clearer demonstration of the part that the accumulation of capital ... plays in normal business activity. Every promise of sustained improvement in the industries making goods for personal consumption has failed of realization because supporting improvements in the ‘capital goods’ industries has not occurred.”
Yes, the capital goods production – production of means of production – failed to improve. And quite naturally so. Just remember the enormous production capacity now unused. This is the constant part of capital which in the process of accumulation increases much more rapidly than variable capital (labor power). In other words there is already such a huge overproduction of capital – of means of production – to the extent that they serve as capital.
One can get a glance from another angle of the capital investment problem by merely taking a look at the figures of new capital emissions. According to Otto P. Schwarzchild, president of the National Statistical Service Inc., the total new financing in the United States (stocks and bonds, but not including municipal bond issues) for the first five months of this year aggregated $229,078,00. This compares with a total for the first five months of last year of $1,600,697,000; and for the same period of 1930, of a total of $2,869,080,000. From this first crisis year till today there is a drop of 92 percent in capital emissions.
These figures illustrate but once again the fact that during times of crisis the demand for industrial capital seriously diminishes. And yet the “wise” capitalist rulers speak of the, expansion of credits to start the wheels of industry turning! For them, however, the question still remains: how are they going to “break the backbone of the crisis?”
“The government must first bring its house in order”, insists the Wall Street bankers. “The budget must be balanced”, was their demand. Now it is balanced – at least, it is a sort of a balance. Provisions are made for supporting the policy of credit expansion. But this credit expansion, instead of turning the wheels of industry, goes into loan capital to pay previously contracted obligations. So, in other words, the government becomes a more active guarantor for these loans advanced to pay interests and principals to the marauding brigands of Wall St. The budget balancing has extended taxation to make up for the expense; and, of course, the excursion into the field of indirect taxation met with some success. The sales tax schemes were finally, in the main, put over, leaving the collections for payment of the bills a broader field, embracing all who are still in a position to buy.
Apparently the so-called relief bills pending before Congress are also making progress. The ideas of those senators and representatives, who champion the interests of the petty bourgeoisie, to secure large appropriations for public works, are rather violently frowned upon. That would be too much like a dole, The Wagner bill now before the Senate meets the favor of those representing the higher brackets of present society. It provides for $300,000,000 in loans to the states – a drop in the bucket even as charity for the millions of unemployed. It provides for $500,000,000 for public works – to be spread over a long period of time. It provides for $1,500,000,000 in debenture for loans to what is called self liquidating enterprises, this to be administered by the Reconstruction Finance Corporation.
The government is surely putting its house in order and following closely the most hopeful designs of the Wall Street pirates. Further enormous sums in credit expansion are to be made available with the hope that the wished for business expansion will result. But there is still a long way to go and that depends entirely on different factors. To recapitulate some of these factors are: (1) Restoration of confidence, within capitalism, in the continuity of the process of reproduction. This is not a mere abstract problem; it involves such questions as markets, profit rate, etc. (2) Raising of the present level of commodity prices. This in other words will mean, at least, a degree of inflation which is practically on the way. (3) Checking the fall in the rate of profit by further increase of capital and thus increasing the mass of profit. This is the crux of the problem. It spells an increase in the intensity of exploitation and further depression of the wage level.
In this we consider only the home front; there still remains for consideration such questions as prospects in the world market. But these indications alone bear witness to the coming higher composition of capital and with it the greater intensity of competition and of class conflicts. They indicate the enormous contradictions in preparation for the next stage.
(Another article in this series will follow next week, dealing especially with the world markets and some prospects. – Ed.)
Last updated: 21.12.2013