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John G. Wright

Has the Depression Already Begun?

(June 1947)

From Fourth International, Vol.8 No.6, June 1947, pp.166-169.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

The attention of the whole world is today focussed upon the health of American economy. There is ample reason for this interest, for the future of world capitalism hinges upon the course of production in this country. The following questions are insistently raised. What is the present condition of US economy? In what direction is it heading? What are its prospects in the next immediate period? We propose to offer some answers to these questions.

The first signs that all was not well appeared toward the end of September 1946 in the sphere of distribution. Inventories of manufacturers, wholesalers and retailers began accumulating at the rate of a billion dollars a month; symptoms of the saturation of the internal market began to appear in retail sales. (For an analysis of this first stage of the downward economic cycle, the stage of the critical turning point in the boom, we refer the reader to the December 1946 issue of the Fourth International, and the article by Art Preis, Economic Trends in the United States, in the January 1947 issue.)

A New Stage Begins

Today these ominous signs are no longer confined to the sphere of distribution but have spread to the decisive sphere of production. The first thing to be noted is a decline in industrial output and factory employment, the first since the postwar boom got under way in September 1945. This decline set in toward the end of April. During the first quarter of this year—January-March — according to the adjusted index of the Federal Reserve Board, industrial output continued at its postwar peak level of 189; non-agricultural employment remained at 42½ million persons, while the army of unemployment hovered around the “prosperity normal” of 2½ million.

The change that occurred in April was by no means spectacular. By the beginning of May industrial output fell off two percentage points to 187; by the end of May it slid another two points to 185. The number of factories that cut back or suspended operations was likewise relatively small.

Hardest hit were the luxury trades (furs, jewelry) and the apparel and textile industries. Some 35-40 woolen mills out of several hundred in New England shut down, while others curtailed production. The slump in textiles spread to the South, with the most drastic curtailments coming in plush, upholstery, cotton hosiery, nylons and handkerchiefs. Similar conditions were noted in the leather and shoe industry.

In contrast to this drop in the non-durable or “soft goods” sector, production of durable consumer goods continued at a record breaking pace, although cutbacks in production also manifested themselves in such lines as lighting equipment, aluminum manufactures, radio and furniture. But this barely made a dent in durable manufactures which kept rolling along at a record pace of 225 per cent of the 1935-39 levels.

Heavy industry, steel, coal oil, likewise maintained their output, as did metallurgy as a whole. The lone cloud on the horizon was aluminum, the first major metal to be affected. The Reynolds Metal Co. shut down its Longview, Wash., plant (capacity 60 million pounds a year) and gave up the rod and bar mill which it had leased from the government. Alcoa reduced production in its Tennessee rolling mills.

At first glance, it would seem that with industrial production pouring out at this rate, American business has little to worry about. Yet, in the face of these figures, there is great concern throughout the business world about an imminent break in the economic situation. This apprehension is well-founded, for these very figures indicate that the peak of production has already been passed, that most of the factors imparting momentum to the postwar boom have spent themselves; and signs of the downward trend are multiplying.

Here we are seeing repeated the customary pattern of downward cycles in capitalist production, during which the soft goods sector is the first to buckle under. Meanwhile durable goods continue to maintain their former pace or even forge ahead temporarily—but only to decline far more sharply at the next phase.

But one unusual factor has intruded itself into the present phase. There has been a sudden and absolutely unexpected curtailment of the construction industry, the major sphere of capital investment. Construction is normally among the last to register declines from boom levels. This is a departure from the customary pattern of capitalist downward cycles.

This spring, during the peak season of the building industry, cutbacks have created a rather high rate of unemployment among construction workers, especially in the New York area, and shut down many small plants servicing this industry, among them 250 sawmills in Georgia and Alabama. We shall deal later with the significance of this phenomenon.

The relatively slight drop of four percentage points in industrial output from the middle of April to the end of May has, however, brought about a significant change in the amount of employment. While Washington has as yet released only scanty figures about the growth of unemployment in this period, the number of jobless is probably approaching the 5 million mark, i.e., it has doubled. Nationally the proportion of unemployed to employed is one to ten. In New York, according to a recently conducted poll, it is one to six; in some parts of the country it is probably higher.

Thus the first unmistakable signs of debility have already begun to appear in US economy. The question is: how serious is this condition and how rapidly will it develop?

The consensus of capitalist opinion continues highly optimistic. Thus the June 2 Journal of Commerce, an authoritative mouthpiece of Wall Street, consoles its readers with the forecast that these symptoms signify merely a trifling ailment, a “levelling off” rather than a “major depression.”

It would be instructive to analyze the arguments of capitalist commentators like the Journal of Commerce in favor of this rosy perspective, in order to see how solid a basis their optimism has.

They rest their case on three main considerations: (1) the sound condition of the domestic market; (2) the booming foreign trade; (3) the expansion of building. If these three conditions are present, then there is indeed ground for optimism. Let us see.

The Journal of Commerce backs up its contention that the domestic market is thriving by the argument that “consumer buying is maintained.” Is this actually so?

Exactly the reverse is true. Retail sales have been steadily falling off in dollars, just as, in the previous period, they had fallen off in physical volume. The dollar volume in retail sales has been kept up in the last period by increasing sales of durable goods which temporarily compensated for the declining sales of “soft goods.” Nevertheless an over-all drop has already begun. This can be seen from the comparative total sales of 296 largest department stores in the country, a key figure carefully compiled by the Federal Reserve Board. According to the May issue of the Federal Reserve Bulletin, these 296 stores sold in the first quarter of the current year a total of 838 million dollars, as against 859 million dollars in the same quarter of 1946, or a drop of 21 million dollars. This means that during the period of peak production and peak employment, the mass of the people were able to buy not more but less than they did the previous year.

This declining purchasing power of the masses produced even a sharper decline in the purchases of the stores themselves. We find that the outstanding orders of these 296 stores dropped almost by half in this same period as compared with 1946! While in March 1946 they ordered 971 million dollars worth of new goods, in March 1947 they placed orders for only 486 million dollars. At the same time retail inventories as a whole soared from 6.2 billion dollars in the first quarter of 1946 to 9.4 billion in 1947; with the inventories of the 296 department stores, leaping proportionately from 583 million dollars in March 1946 to 865 million dollars in March 1947.

What these figures prove irrefutably is that the domestic market tends to contract sharply. Workers have been able to buy less and less, while inventories of high-priced goods kept piling up. At the same time the stores themselves have bought less and less. If such was the trend during peak employment, how can it be expected to reverse itself in the face of rising unemployment and continued high prices? Instead of the trend being reversed, it must necessarily become more accentuated.

What measures have been proposed to remedy this serious situation? Alarmed by the reports of his economic advisers, President Truman has publicly urged a voluntary 10% over-all reduction in prices. There was plenty of ballyhoo around the proposal, but it fizzled. There have been no voluntary price reductions.

Why Prices Stay Up

It is not entirely out of malice or cunning that businessmen all talk about the need for cheaper goods, but do nothing about cutting prices. The manufacturers, wholesalers and retailers have now on their hands mountains of goods that already total close to 40 billion dollars. A ten per cent cut in these enormous inventories would mean an immediate loss of 4 billion dollars; a larger cut would mean a proportionately bigger loss.

The question staring them in the face is: Who shall take this loss? The wholesalers and retailers say—the manufacturers. But the latter are equally convinced that not they but the wholesalers and retailers must pay. While this muffled tug of war between the conflicting sections of the capitalists goes on—with each trying to save himself and let the devil take the hindmost—prices stay up, sales sag, inventories continue to accumulate. The disproportions between peak output and dwindling consuming power become ever more threatening.

What has happened during the spectacular splurge is that the domestic market has been ravaged by steep prices and fantastic profits of the monopolists. Big Business has proudly chalked up an extra 3 billion dollars in profits in the first quarter of 1946 (the 1946 rate of 12 odd billion dollars could not satiate them).

With the removal of all price controls and excess profits taxes, it has taken less than seven months—from October 1946 to April 1947 — for the capitalists to drive the economy from a condition of acute scarcities in virtually every sphere to conditions of glut, except for a few items. This has resulted in the first manifestations of overproduction and unemployment previously described.

This unbridled plundering of the people has gravely impaired their purchasing power, further undermining the domestic market. The most conservative estimates are that from 9 to 10 billion dollars in mass purchasing power were wiped out during the frenzied rise of prices and profits. In the process the meager war-time savings of the workers were swallowed up.

Under these circumstances, retail sales, an increasing proportion of which has consisted of durable goods, could be maintained in only one way, through the extension of consumer credit. This expedient has served to temporarily mask the dangerously impaired condition of the internal market.

Here are a few tell-tale figures, which bear today the aura of prosperity but which will on the morrow spell more cutbacks and shutdowns and more millions of unemployed.

By the end of April consumer credit rocketed to $10,256,000,000. Charge accounts rose to $2,782,000,000. Installment buying passed the billion dollar mark. This does not include automobiles sold on credit (such sales have reached three-quarters of a billion). We also omit mortgages on jerry-built homes, purchased by veterans and other homeless multitudes.

The bulk of these purchases are non-repeatable precisely because they represent purchases of durable goods. At the same time the debts incurred in making these purchases remain as the first charge against future income, leaving the debtors with proportionately less dollars with which to buy more goods.

It is clear that “consumer buying,” far from holding up, is bound to contract sharply in the next period in view of high prices, declining incomes, growing indebtedness and growing unemployment.

In the meantime the monopolists are not devising ways and means to restore or add purchasing power, but are doing everything in their power to maintain high prices and exorbitant profits.

From the standpoint of their immediate interests, they find it preferable to unload high-priced goods, hold down wages and cut-back production. At this stage of the downward economic cycle such a course will wreak greater havoc than was caused by the self-same policies at the peak of the boom.

The realistic perspective for the next immediate period therefore is this: with production, now that all the distribution channels have become clogged, heading downward, the domestic market must follow suit.

So much for Wall Street’s first source of solace.

Foreign Trade

Unable to find adequate outlets at home, can American business perhaps sustain itself by reliance on foreign markets? Here we come to the second argument in Wall Street’s arsenal. Pointing to the booming export trade, the highly optimistic editor of the Journal of Commerce says:

One of the strongest spots at the moment is export trade. Goods have been going out of the country at the annual rate of 16 billion dollars. This compares with earlier official estimates that we would sell abroad about 12 billion dollars of our goods, and actual exports last year of 9.7 billion dollars. For the time being these huge exports are quite a factor in sustaining business.

If the well-being of American economy depends primarily on what happens to its foreign trade, then the outlook is dark indeed. Before foreign trade can achieve any enduring stability, it is first necessary to stabilize capitalism in bankrupt Europe. For the past two years Washington has poured billions of dollars into Great Britain, France and Italy without noticeable improvement. These countries, along with Europe as a whole, continue to stagger from one economic crisis to another.

The subjective factors are now playing the decisive role there. For before Europe can be stabilized economically on a capitalist basis, it must be stabilized politically. But there is no short-term prospect for the realization of this goal. The greatest political convulsions lie not behind but ahead for Europe.

The situation in the Far East, the colonial heart of the world market, is no less unstable both politically and economically. China is torn by civil war. Indonesia and Indo-China are in revolt. India is on the brink of civil war. Prospects of political stability here, too, are rather dim.

On the other hand, those sectors in the Far East which have succeeded in registering a speedy economic recovery, now find that their own rapid progress is beginning to choke them. The rubber plantations, for example, have been restored more quickly than was anticipated. With what results? There is a rubber glut, the price of natural rubber is skidding. Australia and New Zealand have huge stocks of one of their chief products, wool. Their chief customer, the United States, already has a more than adequate supply on hand.

The Philippines are glutted with copra, so scarce only a few months ago. Coffee is again piling up in warehouses in Brazil. The Cuban sugar planters are wondering what to do with their record crops. These dislocations can only become more aggravated as world agriculture painfully climbs upward.

The policy followed by American businessmen on the foreign markets has not differed essentially from their economic policy at home. They have grabbed as much as they could as fast as they could. Soaring prices have slashed the purchasing power of foreign customers by half, by three times and more. The already acute shortage of dollars on the world market is being converted into a famine. This tends to cut down the markets for American exports.

Countries thus depleted of their gold and dollar reserves are compelled to retrench or see their fiscal systems topple. Rather than become hopelessly mortgaged to Wall Street, one country after another is being compelled in desperation to seek salvation by cutting down on American imports.

Still another factor undermining American foreign trade is the inability of the United States to buy anywhere near as much as it sells. As American exports boom, the gap between them and the imports keeps widening. At current levels there is a gap of almost 10 billion dollars between exports and imports.

But couldn’t this gap be bridged by huge government loans and gifts, as many sanguine businessmen believe? Even if this insurmountable problem were “solved” temporarily through such devices, export trade would at best play only a subsidiary part in sustaining American production. Today production is at a level of 210 billion dollars a year. Let us assume that foreign outlets are able to absorb as much as ten per cent of this total (a much higher figure than the current boom). The question still remains what to do with the remaining 90 per cent in view of the shrinking home market.

As a matter of fact, there is slim prospect of maintaining even the present rate of exports. The very same editorial writer who points so hopefully to the unparalleled export boom, is compelled immediately to add:

Now it is quite obvious that experts cannot continue at this rate, unprecedented in war or peace, much longer. The dollar shortage, becoming increasingly acute abroad, will automatically check this boom.

The one hope left is—a prolonged boom in construction. This is precisely why the unanticipated growing paralysis of the building industry is so ominous both with respect to short-term and long-term perspectives.

Former periods of peak production and peak prices have been accompanied by construction booms. This provides the main outlet for capital investment at home. Capitalist “savings,” that is, accumulated profits, are capitalized by conversion into new homes, office buildings, new plants, plant expansion and equipment. In 1946, capital investment in this field lagged badly behind, barely reaching the figure of nine billion dollars, approximately one-half the rate of the boom of the Twenties. At the same time, approximately two-thirds of capital investment in industry has gone not into construction but into equipment.

The Lone Hope

The bulk of capital investments, not less than 15 billion dollars, was diverted into inventories! Profits were lusher in speculation than in home building. That is why inventories, including plant equipment and building materials, continue to swell, while construction plans are shelved, home building is suspended and plants manufacturing lumber and building supplies are shut down.

This singular lag in capital investments in building during the peak of the boom is today being translated into a crisis in construction which coincides with the first cutbacks in industry.

Construction awards thus far in 1947, as reported by the Engineering News Record, the accepted authority in this field, have declined month by month both absolutely and relatively as compared with the 1946 rate. In New York, this agency estimated, there was a 65% drop as against 1946. In Chicago, a 32% dip. In Boston and Seattle construction was sliced almost in half. In Milwaukee and San Francisco by 40%; in Austin, Texas, again by half. This 22 city survey hardly leaves grounds for optimism in the building industry.

The housing authorities in Washington, who had promised that not less than one million new homes would go up in 1947, have scaled down their estimate by a quarter of a million.

Unless drastic measures are taken quickly, the bottom threatens to drop out of this key branch of economy. This may readily spell disaster, because construction as such is both an avenue for capital investment and a new source of purchasing power. Apart from the still prosperous agricultural sector, it constitutes the main potential source of new purchasing power in a shrinking domestic market. What happens in the sphere of construction will have considerable bearing on how rapidly and with what intensity the downward plunge of national economy will occur in the next period.

The prevalent opinion in capitalist circles is that the construction boom has simply been delayed by high prices and that once a price decline sets in, construction will quickly spurt forward. This happened after the crash of 1920-21, and they expect it to happen again.

Such a development in residential building is not excluded. But residential building is only part of a construction boom in general, and of the boom of the Twenties in particular. Without capital construction in industry, residential construction alone cannot maintain industry at high levels. This is admitted even among capitalist economists.

For example, The Twentieth Century Fund, in its just-published monumental volume of 875 pages, entitled America’s Needs and Resources, estimates that to keep economy operating at a level of 177 billion dollar “gross product” a capital investment of not less than 27.7 billion dollars is required. Of this total only 7.2 billion dollars is allotted to “consumer construction” or residential buildings while the rest must go into manufacturing, transportation, utilities and commerce.

But already in the last quarter of 1946 and the first quarter of 1947, the “gross national product” had surpassed the 200 billion dollar mark. Yet, capital investments in this same period were only a fraction of the sum estimated by the Century Fund. In other words, the productive facilities for such output, and an even larger one, already exist.

The Construction Impasse

This blocks off avenues for construction. Thus the Steel Trust has already cut down the larger productive capacity available during the war, because the steel kings see no possible outlet for more steel in the next period. The Electrical Trust likewise refuses to budge. The AT&T is deliberately promoting a telephone shortage for the same reason. In brief, most of the corporations are firmly convinced that their existing plant is more than adequate for their profitable markets. It is primarily for this reason that many construction plans have been shelved.

There is little likelihood that this situation will be reversed in the next period. Corporations that shelved projects in a period of high prices and high profits will hardly resume construction in a period of falling prices and lowered profits.

All indications thus far point to the prospect that capital investments in domestic industrial construction will be kept—as they have been—not at the maximum but at the barest minimum. Just the contrary situation existed in 1921.

This means that the short-term economic perspective is a bleak one. Having started downward, production will continue, with minor fluctuations, to decline.

The exact rate of this decline in the immediate period ahead cannot be determined in advance. Subjective factors play a decisive role here. The actual course which a depression may take at any given time-interval depends to a large extent on the interrelation between and the intervention of the decisive social forces, the basic classes, the ruling class on the one hand and the proletariat on the other.

The capitalist class does not sit passively by and await economic or political developments with folded arms. On the contrary, its agents intervene vigorously and consciously to serve its interests, well or poorly as the case may be. The workers, together with the mass of the people, likewise react to the changing economic situation either instinctively or consciously, depending on the strength of their organizations and their degree of political development. The interaction of these colliding forces causes fluctuations and modifications in the course of all social processes, including those in economic life.

Wall Street has mighty levers at its disposal, the government mechanism and its fiscal system together with its economic “regulators” — the various commodity markets, stock exchanges, the banks, the credit system and the like. While powerless to halt or reverse the basic economic processes, the bourgeoisie is nonetheless in a position, by manipulating these levers, to either retard or accelerate the decline.

Those who control this nation’s destinies have evidently not yet made up their minds about what lies ahead and what they should do. This is indicated by the uncertain behavior of their surest barometer, the Wall Street Stock market which for one whole year has been hovering around last year’s lows, unable to decide whether to sink through this “floor” or to shoot upward again. This expresses the genuine indecision of a class that dares not look economic reality fully in the face. The plutocrats have been proceeding from hand-to-mouth, meanwhile consoling themselves with wishful thinking.

The initial rate of decline averages up to now 2 per cent a month. If this is permitted to continue unchecked, it would mean a drop of about 25% in a year; it would be a catastrophe of major proportions.

A resumption of building on a large scale would cushion this decline for a more or less extended period of time but would not alter the basic downward trend. The next few months will tell the story here.

What form will the depression take? The best that the capitalist commentators themselves hope for is a repetition of the 1920-21 cycle, when the depression hit bottom and spent itself in the space of 18 months, and the economy then rebounded to new heights.

It is still too early to chart the exact form of what lies ahead. We already have a warning signal that customary patterns need not necessarily recur. This signal is the lag of capital investments during the boom and the current peculiar manifestations in the construction industry. These are symptoms of a system that has lost its vitality.

There are several possible variants. Barring a desperate plunge into war by the ruling class (as its sole way of “solving” the crisis) or the intervention of the proletarian revolution, among these variants is one that may combine many of the features of both the 1920-21 depression and the catastrophe that erupted in 1929. In the 1929 crisis economy declined steadily for four years before hitting bottom and was never able to recover to former levels. The current decline may ultimately drop to levels one-fifth to one-third below the postwar peaks, with a “normal” army of 8-10 million unemployed; production may then flatten out at these lower levels for a relatively extended period, only to slide downward again later on. Stabilization at levels within close proximity of those that prevail now is entirely out of the question. On the other hand, some phases of the downturn may prove to be more precipitate than either in 1920-21 or 1929-32. In addition, we repeat, there is a good reason for expecting a combination of developments that may assume entirely unexpected forms.

In any case, there is no ground whatever for confidence in the economic future of American capitalism.

Last updated: 29.12.2005