Chapter VII — The Great Depression

“Happy Days Are Here Again”

“The American Plan; automotive prosperity seeping down
From above; it turned out there were strings to it.
But that five dollars a day
paid to good, clean American workmen
who didn’t drink or smoke cigarettes or read or think,
and who didn’t commit adultery
and whose wives didn’t take in boarders,
made America once more the Yukon of the sweated
workers of the world;
made all the tin lizzies and the automotive age, and
incidentally,
made Henry Ford the automobilieer, the admirer of Edison,
the birdlover,
the great American of his time.”

(John dos Passos, The Big Money.)

The so-called “Golden Twenties” witnessed a boom that was very similar to the boom of the 1990s through which we have just passed. Production soared to dizzy heights, the stock exchange still higher. President Coolidge believed fervently in the supreme wisdom of the market and its invisible hand. The business of government was to do nothing, to allow business a free hand and all would be well. For a time it seemed to work. No attempt was made to control speculation, which soared to the sky and beyond. Big fortunes were made, and as long as the money kept rolling in, why ask awkward questions? The same mood of what we now know as “irrational exuberance” has existed in every boom in capitalism from the Dutch tulip speculation of the 17th century to the new technology boom of the 1990s. And they all end the same way.

In the boom of the 1920s the illusion was created that wealth could be plucked out of thin air. In the stock exchange, money seemed to beget money in a miraculous and mysterious process. As a matter of fact, the boom of the 1920s, like any other boom under capitalism, was based on the super-exploitation of the working class. Between 1925 and 1929, the number of manufacturing establishments in the U.S.A. increased from 183,000 to 206,000 and the value of their output rose from $60 billion to $68 billion.

J.K. Galbraith comments:

“The Federal Reserve index of industrial production which had averaged only 67 in 1921 (1923-5 = 100) had risen to 110 by July 1928, and it reached 126 in June 1929. In 1926, 4,301,000 automobiles were produced. Three years later, in 1929, production had increased by over a million to 5,358,000, a figure which compares very decently with the 5,700,000 new car registrations of the opulent year of 1953. Business earnings were rising rapidly, and it was a good time to be in business.” (J.K. Galbraith, The Great Crash 1929, p. 31.)

This is the real secret of the boom of the 1920s – the extraction of bigger and bigger amounts of surplus value from the sweat and nervous strain of the workers. Workers in the mass production industries – steel, auto, rubber, textiles, oil, chemicals, etc., – were unorganized, atomized and at the mercy of the employers. They were deprived of all rights and open to the most vicious kind of exploitation. Anyone who stood up for the workers’ rights ran the risk of being accused of being a Communist, a Red, or a Bolshevik. Harry M. Daugherty, head of the Justice Department in the corruption-ridden Harding administration, was put on trial on charges of conspiracy to defraud the federal government. Incredibly, he blamed his downfall on a Red plot: “I was the first public official that was thrown to the wolves by the Red borers of America.” In his book The Inside Story of the Harding Tragedy, Daugherty wrote:
“I believed then, as I firmly believe now, that Soviet Russia is the enemy of mankind. That unless the forces of civilization stamp out this nest of vipers who have enslaved a hundred and sixty million human beings, our social system as well as our form of government will perish from the poison that is being poured into our vitals.”

There is a surprising degree of unanimity on this question that extends right across the spectrum of opinion in the community of red-blooded, freedom-loving American entrepreneurs. The following is another good example from an impeccable source:

“We must keep America whole and safe and unspoiled. We must keep the worker away from Red literature and Red ruses; we must see that his mind remains healthy.”

This ringing endorsement of the free market economy was the work of Al Capone, the notorious gangster, while awaiting trial. But Mr. Capone’s touching faith in the market economy was misplaced. Even when he was speaking, America had already entered the Great Depression of the 1930s.

There is always a speculative element in every boom. Demand increases, the market expands, credit is needed for new investment, banks lend money as if there were no tomorrow. Prices rise in step with demand, and wages follow. Real estate prices soar along with the stock markets. Industrial production reaches dizzying heights and there is the beginning of what is now called over-investment, but which is more properly termed over-production. The whole thing is reaching its limits, but nobody knows or cares. Paradoxically, it is precisely at the apex of a boom when it is on the point of collapsing, that the illusion is strongest that the boom will last forever, and that the boom-slump cycle is a thing of the past. Then comes the collapse. In the language of Marxist dialectics, everything turns into its opposite: all the factors that created the upswing now push the whole thing downwards. Cause becomes effect and effect cause. The result is a slump.

Marx explains that the ultimate cause of every real capitalist crisis is overproduction. The automobile tire industry in the U.S.A. had expanded far more than the demand for tires. Shoe factories had a productive capacity about twice the shoe-purchasing requirements of the country. Two-thirds of the potential capacity of the flour industry was not needed. It would have been possible to close about 40 percent of the U.S. steel industry and nobody (except the sacked workers) would have noticed the difference. And so on. When the stock market finally collapsed in October 1929, it was not, as is generally assumed, the cause of the Great Depression, but only a symptom of the underlying problems of the real economy, and a warning of worse to come.

The Great Crash – Then and Now

On 4 December 1928, President Coolidge delivered his state of the Union speech to the nation. In it we read the following:

“‘No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquillity and contentment … and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding…’ He told the legislators that they and the country might ‘regard the present with satisfaction and anticipate the future with optimism’. And breaking sharply with the most ancient of our political conventions, he omitted to attribute this well-being to the excellence of the administration which he headed. ‘The main source of these unexampled blessings lies in the integrity and character of the American people.”

As late as March 1929, when Hoover took over the Presidency, he was still singing the same song:

“We are a happy people – the statistics prove it. We have more cars, more bathtubs, oil furnaces, silk stockings, bank accounts, than any other people on earth.”

Then in October 1929 the stock market collapsed. Industrial production fell by 50 percent and national income fell from $82 billion to $40 billion in just four years. Unemployment soared from two million in 1928 to three million in 1929, four million in 1930, seven million in 1931, twelve million in 1932 and 15 million in 1933.

The optimistic speeches of America’s leaders on the eve of the collapse have been frequently quoted as proof of the stupidity and short sightedness of Coolidge, Hoover and their contemporaries who failed to foresee the Great Crash of 1929 or to take measures to prevent it. The comforting assumptions are that a) slumps are produced by the stupidity or mistakes of governments and leaders, and that b) our present governments and leaders are much cleverer than Coolidge and will not make the same mistakes again. Unfortunately, both assumptions are false. The history of the past 200 years should be enough to convince any reasonable person that the boom-slump cycle is something inherent to the capitalist system and not an accident caused by clumsy behavior. As sure as night follows day, a period of boom will be followed by a slump. Only the timing, duration and depth of the slump is unpredictable. But slumps under capitalism cannot be avoided.

It is true that the capitalists have evolved a number of mechanisms for postponing a slump, but the problem is that usually the very act of postponing it makes it all the more severe when it finally arrives. Chief among these mechanisms is credit, which, as Marx explained long ago, is a way by which the market (“demand”) is extended beyond its natural limits. This can work for a time, but only at the cost of increased levels of indebtedness. This means that the market is expanded today at the cost of undermining it tomorrow. The central problem is not abolished but aggravated in the long run.

The idea has often been repeated that “we have learned from history” and that therefore a repeat of 1929 is not possible. This is an excessively optimistic view of things. Hegel was much more realistic when he wrote that anyone who studies history can only conclude that nobody has ever learned anything from it. He said that precisely because the same situations continually repeat themselves in history in general, and we might add, in economic history in particular. There are many striking similarities between the boom of the second half of the 1920s and the boom of the second half of the 1990s. Then too the economists and politicians assured us that the boom-slump cycle had been vanquished forever. Marx had been consigned once and for all to the dustbin of history. Once again, they were all merrily plunging into a speculative orgy that drove the stock markets to unprecedented heights. Then came the fall.

It is true that so far, the fall has not been as steep as in 1929. Indeed it has been one of the mildest on record. But the story is not yet ended. The boom of the 1990s, like the boom of the 1920s, was based on a speculative bubble of vast proportions. That bubble has not yet been entirely burst. In fact, they are currently busy reflating it. The astronomical levels reached by the housing market internationally is a symptom of this fact. It bears an uncanny resemblance to the property boom in the 1920s, the bursting of which was one of the things that led to the collapse of 1929. Alan Greenspan long ago referred to the “irrational exuberance” of the boom of the 1990s. But he is doing nothing to restrain this exuberance, which poses a serious threat to the future prospects of both the U.S. and world economy. The longer the bubble is allowed to inflate, the more painful the final reckoning will be. This is what J.K. Galbraith has to say on this subject:

“A bubble can easily be punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy. Among those who sensed what was happening in early 1929, there was some hope but no confidence that the boom could be made to subside. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came. There was no question whatever as to who would be blamed should the boom be deliberately deflated (For nearly a decade the Federal Reserve authorities had been denying their responsibility for the deflation of 1920-1.) The eventual disaster also had the inestimable advantage of allowing a few more days, weeks, or months of life. One may doubt if at any time in early 1929 the problem was ever framed in terms of quite such stark alternatives. But however disguised or evaded, these were the choices which haunted every serious conference on what to do about the market.” (J.K. Galbraith, op. cit., p. 52.)

These lines could have been written yesterday. They are a graphic warning of just how little the economists and politicians have learned from the past, and just how little they can control the boom-slump cycle. Contrary to the received wisdom, a repeat of 1929 at some stage is not at all ruled out. In fact, it is implicit in the whole situation.

The New Deal

The Stock Market crash in 1929 and the ensuing economic slump punctured the dream of never-ending prosperity and pushed millions into poverty. Construction and housing stagnated after 1929, joining declines in the agriculture, mining and petroleum industries. Overproduction dragged down prices and profits. Wages did not rise fast enough to enable consumers to purchase all the new homes and home products offered for sale. Foreign trade was constrained by growing protectionism in the industrialized world. The Stock Market Crash led to a collapse of consumer confidence and led to a crisis of the financial institutions. Investment slumped. The economy sank into a severe depression, referred to by Americans as the “Great Depression”. This was characterized by high levels of unemployment, negligible investment, and falling prices and wages. Millions of Americans were out of work and living precariously on public or private charity. When Russia invited Americans to apply for six thousand skilled jobs in 1931 it received a hundred thousand applications. Millions of Americans were reduced to penury. A survey in New York City in 1932 concluded that 20 percent of the children were suffering from malnutrition.

A report in a Chicago newspaper graphically describes the conditions:

“Around the truck which was unloading garbage and other refuse, were about thirty-five men, women, and children. As soon as the truck pulled away from the pile, all of them started digging with sticks, some with their hands, grabbing bits of food and vegetables.”

John Steinbeck was the author of novels depicting the lives and struggles of ordinary working Americans during the Great Depression – The Grapes of Wrath, Cannery Row, of Mice and Men. The Grapes of Wrath was published in 1939, when America had still not emerged from the Great Depression and millions were living in dire poverty. Steinbeck’s poignant description of the conditions of the hungry and downtrodden, and their struggle to maintain human dignity, won him the Pulitzer in 1940.

In this novel Steinbeck vividly describes the ruthlessness of the big corporations that sent in the bulldozers to demolish the smallholdings and cabins that represented so much hope and so many years of labor. Men, women and children were evicted overnight and transformed from small farmers into propertyless vagrants. The most remarkable thing about this novel is that it does not seem to be a description of the masses written from without. The author has succeeded in getting under the skin of the “Okies”, and expressing, in their own words and language the innermost thoughts, feelings and aspirations of the people. Here, for example, is how they see the police:

“‘What’d the deputy say?’ Huston asked.

“‘Well, the deputy got mad. An’ he says: “You goddamn reds is all the time stirrin’ up trouble,” he says. “You better come along with me.” So he takes this little guy in, an’ they give him sixty days in jail for vagrancy.’

“‘How’d they do that if he had a job?’ asked Timothy Wallace.

The tubby man laughed. ‘You know better’n that,’ he said. ‘You know a vagrant is anybody a cop don’t like. An’ that’s why they hate this here camp. No cops can get in. This here’s United States, not California’.”

Tom Joad expressed the voice of the underdog:

“They’re a-workin’ away at our spirits. They’re a tryin’ to make us cringe an’ crawl like a whipped bitch. They tryin’ to break us. Why, Jesus Christ, Ma, they comes a time when the on’y way a fella can keep his decency is by takin’ a sock at a cop. They’re workin’ on our decency.”

In a situation where millions were going hungry, Hoover decided that relief was exclusively a matter for the local and state authorities. This worthy representative of big business, a millionaire himself, was concerned lest federal relief should corrupt the American character and undermine the spirit of free enterprise. For Hoover and the Establishment there was no problem: the market would sort things out in the long run. But as the English economist John Maynard Keynes pointed out, in the long run we are all dead.

There was a sharp increase of political ferment and discontent among the workers of America. At that time many of the strategists of Capital feared a socialist uprising in the U.S.A. In order to prevent revolution from below, as so often happened in history, the more far-seeing sector of the U.S. ruling class decided to launch a program of reforms from above. In this way the idea of the New Deal was born. The Democratic President Franklin D. Roosevelt was elected in 1932. He implemented a number of programs to relieve the plight of the poor and unemployed. Over the past twenty years, historians have emphasized the “revolutionary” legislation of the Roosevelt administration. However, at the time, he was bitterly attacked by Conservative businessmen as a revolutionary and a Communist.

F.D. Roosevelt was no radical but the son of a wealthy patrician family and a relative of Theodore Roosevelt. Actually, he was attempting to combat the spread of Communism in the U.S.A. and save the capitalist system from revolution. He probably saved the American ruling class from the threat of social revolution, which was closer then than at any other time in American history. But the Establishment was too stupid to realize this. They distrusted Roosevelt and heaped abuse on him as a covert socialist and a dangerous radical. Roosevelt protested that this was a misunderstanding – and he was right. “I am fighting Communism, Huey Longism, Coughlinism, Townsendism,” he declared. “I want to save our system: the Capitalist system.” The difference is that he was a more competent defender of capitalism than his opponents. Roosevelt was smart enough to see that Hoover’s policies would undermine capitalism in the U.S.A. quicker than anything else.

In the middle of a terrible agricultural crisis, Hoover had the brilliant idea of asking the farmers to reduce their crops, a piece of advice that rivals Marie Antoinette’s “let them eat cake”. Roosevelt correctly said that it was a “cruel joke” to advise the “farmers to allow 20 percent of their wheat to lie idle, to plough up every third row of cotton and shoot every tenth dairy cow.” In order to defend the fundamentals of capitalism, Roosevelt was prepared to be flexible. In an emergency, he was prepared to resort to deficit financing to keep the level of unemployment within certain limits. But this policy has its limits. If it is continued for a long time it will have inflationary consequences. Therefore, as soon as there were signs of a modest economic recovery, Roosevelt cut back on state expenditure. This produced a sharp recession in 1937 and unemployment again doubled from five to ten million and remained high until the outbreak of War.

A whole mythology has grown up about the New Deal. Those who believe that capitalism can be reformed in such a way that it can avoid slumps and achieve social justice point to it as proof of their assertions. But in practice, Roosevelt’s policies had at best only a marginal effect in pulling the U.S. economy out of the slump. The recovery, when it finally came, was not due to the New Deal but to the Second World War. The lowest point of the Great Depression was in 1933, but the U.S. economy showed very little improvement through the end of the decade, and remained grim until it was dramatically reshaped through America’s arms program and participation in the Second World War, which had an even bigger effect than the previous one in stimulating the U.S. economy.

The CIO and the Sit-In Strikes

Following the Great Crash of 1929, the bosses launched on a program of savage wage cuts. The AFL responded by announcing “no-strike” deals. This was supposed to be the result of a “gentleman’s agreement” between the unions and the bosses. But in practice the unions conceded everything, the bosses nothing. From 1922 to 1929 the number of labor disputes diminished year after year. In 1929 there were only 903 labor disputes involving 203,000 workers. On September 1, 1929, noting with satisfaction that the number of strikes in the U.S.A. had gone down from 3,789 in 1916 to 629 in 1928, AFL President William Green asserted that “collective bargaining is coming to be accepted more and more as a preventative of labor disputes.”

Weakness invites aggression. In June-July 1930, 60 corporations and industries announced wage cuts, and the AFL did nothing about it. The result was a rapid decline in union membership. In 1929 only one in five industrial workers belonged to a union in the U.S.A. Of those who did, nearly half were either building or transport workers. By 1931 the AFL was losing 7,000 members a week, and from a high of 4,029,000 in 1920, fell to 2,127,000 in 1933. This is a fitting epitaph on the supposedly “realistic” policies of “unionism pure and simple”.

These were years of violent class struggle in the U.S.A. As Art Preis recalled in his book Labor’s Giant Step: “Almost all picket lines were crushed with bloody violence by police, deputies, troops and armed professional strike-breakers.” The mass demonstrations of unemployed workers organized by the Communist Party were broken up violently by the police, with many jailed, wounded or killed. On March 7, 1932 a demonstration of unemployed demanding work at the Ford Rouge Plant was dispersed with machine-guns, leaving four dead and many wounded. On the direct orders of President Hoover, General Douglas MacArthur, riding a white horse at the head of his troops, attacked a demonstration of 25,000 unemployed war veterans and their families with tear gas, gunfire and bayonets. Such “incidents” were common throughout the 1930s – including under Roosevelt’s “New Deal”. In 1937, for example, ten people were killed and 80 wounded in a Memorial Day clash between police and members of the Steel Workers Organizing Committee at a plant of the Republican Steel Co. in South Chicago.

Several AFL unions established the Committee for Industrial Organization (CIO) to organize the unorganized industries. This organization effort had great success in the rubber, steel, and automobile industries. The internal dispute over organizing these industries continued and, in 1938, the AFL expelled the unions, which formed its own federation and called itself the Congress of Industrial Organizations. John L. Lewis of the United Mine Workers became the organization’s first president. The formation of the CIO was labor’s giant step. Overnight the unorganized were organized. It is not generally realized that the Trotskyists – especially in Minneapolis – helped lead the big Teamsters strikes, which led to the formation of the CIO. People like Farrell Dobbs played a key role, all the more extraordinary given that he had voted Republican in the most recent elections. As a result of the experience of the class struggle he went straight from Republicanism to revolution. This little detail shows how fast moods can change.

Most people believe that it was the French workers who invented the method of factory occupations during the 1930s. Not so! The American workers in the early 1930s developed a powerful movement known in the U.S.A. as the sit-down strikes. It involved employees going to their workplaces and then refusing to work. That is a factory occupation in all but name. The first successful sit-down strike happened in Flint, Michigan in 1937 when the United Auto Workers at a GM factory stopped production. This controversial method proved effective, yet controversial among management and some labor leaders. In the first large sit-down strike the United Rubber Workers (CIO) won recognition from the Goodyear Tire and Rubber Co. But not every strike ended in victory. The five week long “Little Steel” strike was broken when Inland Steel workers returned to work without even having won union recognition.

The militancy of the CIO had dramatic results. It quickly reversed the decline in union membership and led to the organization of new layers who showed great energy and élan. Very soon the CIO had gained two million new members. The mass factory occupations were illegal, but the workers newly awakened to the struggle were determined to fight for their rights. One worker recalled the tremendous spirit of class solidarity:

“It was like we was soldiers, holding the fort. It was like war. The guys became my buddies.”

And it was war: class war. The big corporations like General Motors and Ford spent millions of dollars a year on spies and private police to fight the strikers. But the workers’ organization, class consciousness and discipline defeated the bosses and their hired gunmen.