Lynn Walsh: A period of Depression

[Militant International Review, No 53, p. 19-25]

Is the world economy in just another cyclical recession? Or a long-term period of depression? Lynn Walsh examines the arguments.

The seasons have changed many times since Clinton, Major, and other capitalist leaders first pointed to ‘green shoots of recovery’. Yet so far, recovery from the recession which began in 1990 has been feeble, to say the least. The huge mountain of debt built up during the 1980s expansion still acts as a drag on the advanced capitalist economies, despite cuts in interest rates. Unemployment has not been significantly reduced, and will remain at around 34m in the OECD countries. Stagnation in Japan and a decline of production in Germany now threaten to dampen the recovery in the US, Canada, Britain, and the other ‘Anglo-Saxon’ economies.

In promising recovery just around the corner, capitalist leaders talk as if they were dealing with just another short-term cycle. Recovery, they imply, will naturally follow recession, just as spring follows winter. Yet there are a growing number of commentators who are more realistic – and far more pessimistic. They recognise that since the exhaustion of the long upswing which followed the second world war, the economic climate has changed, and changed utterly.

Commenting on the ‘contradictory signals’ emitted by the US economy in 1992, a prominent economist raised the question: “Is it conceivable that the United States has entered a period not simply of recession and temporary cyclical downturn, but – of long-term, persistent stagnation? … Stagnation has been evident in numerous economic indicators for a considerable period”. (Gar Alverovitz, Washington Post/Guardian Weekly, 19 April, 1992).

Early in 1993, another economist, James Davidson, of Strategic Advisors Corporation, Boston, poured scorn on renewed claims of a US recovery: “The past three years have not been a normal postwar recession, but a depression. Depressions don’t end just because we have an election or a Christmas shopping spree”. (Wall Street Journal, 11 February, 1993).

Davidson goes on to define depressions as “periods of long-term structural adjustment that require the liquidation of bad debts and the shrinkage of excess capacity. This process has only just begun. If I am correct, the current episode of strength will soon peter out in a triple dip, followed by a deeper stage of depression”.

Davidson dates the beginning of the current depression back to 1973-74: “…the current depression was set in motion 20 years ago by the OPEC shock, a trillion dollar wealth transfer that raised inflation and lowered real rates of growth.”

How they have changed their tune! Only two or three years ago the Wall Street Journal was a strident voice of capitalist triumphalism. In 1989-90, as the Stalinist economies crumbled into dust, the Reagan boom was presented as the ‘Mother of all Recoveries’, introducing a new era of everlasting upward progress.

Under the headline ‘Reagan’s Awesome Economic Boom’, the Wall Street Journal (8 March, 1991) boasted: “The 92-month economic expansion in the US that began in November 1982 and ended in July 1990 was three-and-a-half times as long as the average peacetime expansion since 1919, and second only to the record of 106 months in 1961-69. Such an exceptionally long period of rising output and employment left the country with enormous cumulative gains that will be barely dented by what appears to be a mild downturn”. But the real legacy of the 1980s is not ‘cumulative gains’ – it is an accumulation of intractable problems and sharpened international contradictions.

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The US was the main locomotive of the 1980s expansion. But it was fuelled by massive quantities of debt – by the $200bn plus Federal budget deficit, and by massive corporate and household/consumer debt. This was largely financed from the capital flows generated by the trade and current account surpluses built up by Japan and Germany. As a result, international imbalances were aggravated, sharpening trade tensions between the deficit and the surplus countries. Despite heavy investment in high-technology sectors – like computers and electronic equipment, electronic consumer goods, telecommunications, and vehicles – the 1980s expansion failed to reverse the long-term overall decline of investment levels and productivity growth that began in the late 1960s. Despite the recovery of profits, mainly achieved through squeezing more effort out of fewer workers, capital investment remained at a lower level than in the long upswing. In Europe mass unemployment reached a new plateau between 9m and 12m, while the growth of jobs in the US was based on the spread of poverty-level wages, casualisation, part-time working and double jobs, especially for women.

Internationally, economic relations became much more volatile. The exchange rates of the major currencies have fluctuated like a roller-coaster. A flood of ‘hot money’ swirled from one national economy to another, as speculators attempted to profit from exchange-rate and interest-rate fluctuations. These speculative flows reached $880bn a day by 1992.

This is a new period, totally different from the long upswing of 1950-73. During that period there were stable world economic relations, sponsored by US capitalism, with its overwhelming economic and strategic power. The Bretton Woods system of fixed (but adjustable) exchange rates, anchored to the US dollar (which was in turn pegged to gold) provided a reliable medium for world trade and finance. The accelerated growth of world trade, facilitated by rapid tariff reductions under the GATT system, was one of the most dynamic stimulants to growth. There was a rapid catching up by Germany, Japan, and other advanced economies through the transfer of US technology and assembly-line production techniques, initially spurred by the worldwide investment of the US multinational corporations.

Within the advanced capitalist economies, historically high levels of real wages and state expenditure helped sustain high levels of demand, which stimulated high levels of capitalist investment and profitability.

The short-term trade cycle continued to operate, but was relatively short and shallow compared to the nineteenth century. Recessions involved either small falls in output or merely stagnation. Moreover, recessions tended to be ‘self-correcting’, eliminating some of the problems facing the capitalists. For instance, excessive credit tended to be squeezed out, unprofitable firms eliminated, balance of payments problems curbed, etc. Upswings tended to raise the level of growth above the previous peaks. Beneath the short-term trade cycle there was a sustained upward curve of capitalist production.

After two decades, however, the underlying conditions of the long upswing were inevitably eroded. A slowdown in the growth of productivity, under conditions of full employment and strong trade union organisation, resulted in a squeeze on capitalist profits. There was a slowing of investment, further retarding productivity growth. By the late 1960s all the conditions for a crisis were being prepared. In the early 1970s growing US inflation and the instability of the dollar led to a breakdown of the world monetary system. In 1973 the quadrupling of oil prices by the OPEC oil producers, partly in response to growing inflation, triggered the world slump of 1974-75, the first major downturn since the second world war.

This undoubtedly marked the end of the upswing, as was widely recognised at the time. In retrospect, however, 1974-75 can also be seen as the beginning of a new historical period: an era of depression.

This does not mean that there has been a steady, downward curve in the world capitalist economy since 1974-75. There is still a short-term cycle of recession and recovery. The expansion of 1983-89, for instance, was hailed as a great boom. However, in contrast to the postwar upswing, the recoveries after 1975 no longer corrected the factors tending to produce downturns. Nor did they they secure strong, broadly-based growth.

The limited recovery of 1976-79 was accompanied by accelerating price inflation, producing the term “stagflation”. In contrast, the remarkable recovery of the 1980s was accompanied by a marked reduction in price inflation levels – but at the same time, brought about a massive inflation of property and financial asset prices. Profitability was partially restored – without leading to a full recovery of investment. Real wages were squeezed, unemployment rose to new levels. while state expenditure was cut back – all undermining the market for capitalism. There was an acceleration of world trade and capital flows, but this went with an unprecedented instability in world financial markets, highlighted by the financial crash of 1987 and the crisis facing major international banks.

While there can be short-term recoveries, the underlying trend is towards decline and crisis.

In short, while there can be short-term recoveries, the underlying trend of the world capitalist economy is towards decline and crisis. Nevertheless, use of the term ‘depression’ may well be questioned. This partly reflects the fact that the word came to be considered almost archaic during the postwar upswing.

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The term ‚depression‘ is commonly associated with the period immediately following the world financial crash in the autumn of 1929. In the US GNP fell for four consecutive years, by a total of over 30%. In Germany GNP fell by 16% during 1929-33, and in Britain by 6% during 1929-31. This period of economic collapse, mass unemployment and poverty is commonly known as the ‘Great Depression’. As a result, ‘depression’ is often assumed to mean ‘slump’ or ‘deep slump’.

But this is really a confusion of the clear terminology required to understand economic developments. ‘Slump’ properly refers to the trough phase of the relatively short-term economic cycle, when there is an absolute fall in production and trade. 1929-33 was undoubtedly a deep slump. Since the second world war there have been two slumps, 1974-75 and 1979-81, which came after the exhaustion of the long upswing.

The sustained 1950-73 upswing (in the advanced capitalist countries) is commonly referred to as ‘the post-war boom’, the ‘long boom’, or simply ‘the boom’. This was really stretching the term ‘boom’ to cover a protracted upswing, whereas strictly speaking it refers to the recovery phase of the short-term cycle following a recession or slump.

The upswing was punctuated by relatively shallow recessions, each giving way to renewed growth which surpassed previous levels. During this ‘golden age’, as it is now nostalgically called, the apostles of capitalism claimed that slumps and depressions were things of the past, never to return.

The definition of ‘recession’ varies slightly from country to country. In the US and Britain it usually refers to an absolute decline in production over three successive quarters. In Germany and Japan, which until recently had higher growth rates, recession frequently refers to periods of slow growth or stagnation, not necessarily absolute decline. For most capitalist economists, who believe in the everlasting growth potential of the market economy, ‘recession’ has become a. euphemism for ‘slump’ – which has almost become a taboo word.

The word ‘depression’ also virtually disappeared from the economic vocabulary, except as a term to describe the 1930s. Only now is it beginning to be used again in the pages of the serious capitalist press.

In the entry ‘depressions’ in the four-volume New Palgrave Dictionary of Economics (1987), the economic historian Sidney Pollard writes that the term depression “is reserved for longer periods of more serious adversity on an international scale, in particular the Great Depressions of 1873-96 and of the 1930s. By analogy, the distressed years following the Napoleonic wars and the years since the downturn of 1973 have also been included in that category”. Pollard observes that “such was the extent of their economic adversity, that it is only the four to six years following the New York stock exchange crash of autumn 1929 which are commonly referred to as the ‘Great Depression’.” However, “in more normal circumstances, the whole of the three Juglars (short-term trade cycles averaging about seven years during the nineteenth century, named after Clement Juglar), 1920-39 or 1920-45, might have been taken as the depression…”

The first world war was followed by a slump in 1920-21. The industrial capitalist economies were gripped by inflation, mass unemployment, and intense international rivalry leading to trade wars. The frenzied boom of the late 1920s was followed by the stock exchange crash of 1929 and the economic slump of 1929-33. Moreover, writes Pollard, “the trade cycle boom of 1937 was extremely weak and carried many signs of turning into a further severe depression, which was avoided only by the preparations for (the second world) war”.

The term ‘depression’, therefore, defines a prolonged economic conjuncture characterised by growing ‘organic or ‘structural’ problems, as opposed to cyclical problems, for capitalism. Depressions, however, do not conform to some abstract pattern. Each depression develops under concrete historical conditions, and has its own particular characteristics and trajectory.

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The expression, ‘Great Depression’ was first used to describe the two decades from about 1873 to 1895-96, a period of sharp cyclical crises in the leading capitalist countries, i.e. Britain, France, Germany, and the United States. In contrast to today’s tendency to accelerated inflation, the main feature was a prolonged decline in prices, ranging between 30% and 45% over the whole period. This flowed from intensified international competition and overproduction. Periodic downturns, accompanied by financial crashes, provoked high unemployment, exacerbating overproduction and the collapse of profits.

Writing a new preface to Marx’s Capital, Volume 1, in 1886, in the middle of this period, Frederick Engels commented that “The ten-year cycle of stagnation, prosperity, overproduction and crisis … seems indeed to have run its course; but only to land us in the slough of despond of a permanent and chronic depression. The sighed-for period of prosperity will not come; as often as we seem to perceive its heralding symptoms, so often do they vanish into air. Meanwhile, each succeeding winter brings up a fresh great question: ‘What to do with the unemployed?’ But while the number of unemployed keeps swelling from year to year, there is nobody to answer that question; and one can almost calculate the moment when the unemployed, losing patience, will take their own fate into their hands”.

It was around this time that bourgeois economists, who were mostly completely ignorant of Marx’s earlier and more profound analysis of the cyclical nature of capitalism, began to discover the phenomenon of trade cycles. In 1889, for instance, the French economist Clement Juglar published his Commercial Crises and their Periodic Return. France in particular was hit by periodic speculative bubbles followed by financial collapse and a fall in production.

While the effects of unemployment were savage, however, employed workers benefited from an overall increase in real wages as a result of falling prices – and this encouraged workers’ struggles to organise trade unions and secure better conditions. During the 1880s and 1890s, moreover, the foundations were laid for the future leadership of German and US capitalism, which overtook British capitalism towards the end of the nineteenth century. US capitalism, with abundant land and raw materials, labour drawn from Europe, and rapid technological development, was on the verge of a phenomenal period of expansion which established its world supremacy. Unlike today, the growth of the US economy offered an escape route for millions of Europe’s unemployed.

The growth of US and German capitalism provided the impulse for a new economic upswing between 1896 and 1913. The prolonged boom of that period represents the biggest expansionary period of capitalism prior to the 1950-73 upswing. Yet the intensified competition between the capitalist powers led to a competitive scramble for markets and colonies, which exploded in the first world war of 1914-18. The barbarous military conflict was then followed by a new period of great depression, much more brutal than the previous depression.

* * *

The history of short-term economic cycles and, more especially, long-term cycles of upswing and depression punctuated by social crises and wars, underlines the erratic, unplanned nature of capitalism. Periods of economic progress, in which the forces of production are developed and living standards are (usually very unequally) raised, are bought only at the cost of long periods of mass unemployment and poverty, profound insecurity, and bloody conflict between rival capitalist states.

From a historical and theoretical point of view, therefore, the boom-time claims of bourgeois apologists in the 1960s were absurd. They argued that through state intervention and Keynesian-type economic management, the capitalist system (alias the ‘mixed economy’) could achieve perpetual growth, uninterrupted by serious crises. Through the ‘social market’, giving workers’ higher wages and welfare benefits, there would be social harmony and political stability, leaving behind forever the class conflict of the 1930s.

The current depression, defined as a period of stagnation and decline, must be dated back to 1973-74.

Dreams like that depended on the high rate of growth achieved in the 1960s, which capitalism, because of the contradictions at the heart of the system, could not indefinitely sustain. For those with a historical perspective, it can be no surprise that the upswing has given way to a new depression. As always, consciousness lags behind reality, and the vision of bourgeois commentators is invariably distorted by wishful thinking.

Referring to the current period, Sidney Pollard writes: “The depression itself was triggered by the floating of the dollar in 1973 and the drastic oil price rises engineered by the OPEC countries in 1973-74 and again in 1979, but these themselves were symptoms and consequences of creeping inflation which had accompanied the remarkable world boom of 1945-73… Inflation apart, the current depression bears some marked similarities with earlier ones”.

Looking back, the current depression, defined as a period of stagnation and decline, must inevitably be dated back to 1973-74. That crisis marked a qualitative change for world capitalism. The abundant supply of cheap oil seized up, inflation exploded, and the hegemonic position of the US dollar collapsed, throwing the world money system into chaos. These shocks detonated the disintegration of the favourable nexus of economic and social relations, nationally and internationally, which supported the long upswing.

The new depression will inevitably have its own unique trajectory. It will pass through a series of phases, some of which will appear to contradict the underlying curve, or even the whole character of the period – as was the case with the 1980s expansion. Moreover, the current depression may well be more protracted than. previous depressions.

* * *

There have already been several distinct phases since 1973, which can be briefly summarised as follows:

1. The first phase 1974-79 began with a short, sharp slump in the advanced capitalist countries (ACCs) in 1974-75. This was followed by a weak recovery between 1976-79. Annual growth averaged only 2.7% in the OECD countries as a whole, compared with 4.5% during 1951-73. High unemployment was combined with high inflation: ‘stagflation’. Capitalist profitability declined sharply, leading to reduced levels of capital investment and productivity growth. The effects of the slump were cushioned by the ‘recycling’ of the oil producers’ ‘petro-dollars’ (when real interest rates were very low because of high inflation) via the big international banks. First the loans went to governments in the advanced capitalist countries to finance their budget deficits, and subsequently to governments in the underdeveloped countries – priming a debt time-bomb for the 1980s. After the experience of stagflation, the strategists of the bourgeoisie abandoned Keynesian economics and turned to neo-liberal or monetarist policies.

2. A second phase 1979-89 began with a slump in 1980-82. The downturn was deliberately provoked by the adoption of monetarist policies: a severe squeeze on liquidity through tightening the money supply, imposing high interest rates, and curbing the growth of government spending in order to squeeze out inflation.

The US then led the advanced capitalist countries in a prolonged recovery during 1983-89. This comprised two cycles, 1983-85 and 1986-89, punctuated by the dramatic fall of the dollar. The US expansion was basically a massive consumer boom sustained by the huge Federal budget deficit and the phenomenal growth of corporate and household credit, i.e. debt. The US expansion was supplied with industrial and consumer goods by Germany and Japan and largely financed from the capital surpluses which they built up as a result. Unemployment was sharply reduced in the US, but at the cost of low wages, casualisation, etc., while remaining historically high in Europe.

Overall, the OECD economies grew by 2.8% per year during 1979-90, only fractionally higher than 1973-79 (2.7%). A marked recovery in capitalist profitability was achieved mainly through squeezing workers’ wages. But there was no accompanying investment boom. There was an orgy of speculative profiteering in property and financial markets, but definitely no return to the ‘Golden Age’ of 1950-73 for the real economy. There was a process of ‘capital deepening’, replacing old plant with new labour-saving equipment in fast-growing, high technology sectors (electronics, electronic consumer goods, telecommunications equipment, vehicles, etc.). ,But there was little ‘capital widening’, i.e. very little investment in new factories, additional capacity, etc. As a result, there was a horrendous growth of ‘structural’ – permanent as opposed to cyclical – unemployment.

3. The latest phase opened at the end of 1989, with a recession in the US, Canada, Britain, Australia and the Nordic countries. This was a relatively shallow downturn, apart from Britain and the Nordic countries, but prolonged. The recovery in the US has faltered several times and is still weak, more like 1976-79 than the 1980s. The main retarding factor has been the enormous weight of the debt built up during the 1980s, which was increased in real terms by the sharp decline of property and share prices (an effect known as ‘debt-deflation’). This has depressed consumer spending and investment. Recovery in the Anglo-Saxon economies is also being held back by the recession in Japan and Germany. Japan was hit especially hard by the fall in asset prices and instability in its financial system. Germany, which went through a growth spurt at the time of unification in 1990, has now plunged into a deep recession.

De-synchronisation between the cycle in the Anglo-Saxon economies, on the one hand, and Germany/France and Japan, on the other hand, will undoubtedly slow down overall cyclical recovery in the advanced capitalist countries.

* * *

Underlying this chronological development of depression are a number of fundamental problems.

In each of these phases, there were developments that tended to mitigate and counteract the sources of economic crisis, which capitalist governments attempted to reinforce through their policies. Such action, however, invariably fostered the elements of future crises. For example, in 1974-75 the expansion of liquidity (facilitated by floating exchange rates and the recycling of oil money) mitigated the crisis – but fuelled inflation and laid the basis of the Third World debt crisis in the 1980s. As another example, in the 1980s the tightening of the money supply and high interest rates sharply reduced price inflation, but at the same time stimulated asset price inflation (property prices, share prices, etc.) which fuelled the expansion of credit and speculative activity. Curbs on wages and a shake-out of labour partially restored profitability, but at the same time cut the market for capitalist goods, especially when workers reached their credit limits.

This is not just a question of swapping one crisis symptom for another. There is a spiral of accumulating contradictions – which means that the position of world capitalism is now far worse than before the 1980-82 slump.

Within the national economies of the advanced capitalist countries, with variations from country to country, there has been an undermining of the favourable social-economic conditions of the postwar period. There has been a sharp reversal during the 1980s of the limited but significant postwar shift of wealth and income away from the capitalist class and towards the working class through higher real wages, full employment, progressive taxation and higher state expenditure. This has restored short-term profits but profoundly eroded the market for goods, on which the profits of the capitalists ultimately depend. Without the prospect of a sustained market, the capitalists will not invest in the new plant and equipment essential for long-term growth, despite high short-term profits. The crisis of demand was mitigated, or postponed, during the 1980s expansion by demand for luxury goods from the wealthy, who profited from the speculative boom, and the additional credit (i.e. debt) taken on by middle-class and working-class consumers.

New technology has also contributed to the tendency towards depression. In the 1950s and 1960s new technology linked to mass, assembly-line production methods (introduced widely in the US in the 1940s) generated an enormous expansion of industry, and accompanying transport, communications, and other infrastructure. Whole new industries developed: vehicles, aircraft, electronics, synthetic materials, etc. Since the mid-1970s, however, new technology has mainly been introduced by the capitalists to save labour and inputs such as energy and materials. This has cut the market for both capital goods and consumer goods.

The economic hegemony of US capitalism, on which the postwar economic order rested, has been undermined.

Internationally, the favourable relations of the postwar period have also been fundamentally undermined. Above all, the economic hegemony of US capitalism, on which the postwar economic order rested, has been undermined. The dollar is still the main world currency. But the US is now a debtor nation and can no longer act as an effective anchor to the world money and financial system. The stable framework of the Bretton Woods money system has given way to the instability and periodic turmoil of the floating exchange rate regime, as demonstrated again in the EMS crisis of September 1992 and July/August 1993. The deadlock in the Uruguay round of the GATT negotiations is a reflection of the creeping protectionism between the EC, Japan, and the US – with the crystallisation of rival trade blocs Massive speculative capital flows make it impossible for capitalist governments to adopt national economic policies insulated from the turmoil of the world economy.

The underdeveloped countries of the Third World did not experience a boom during the 1980s. The profound social and economic crisis of these countries is beyond the scope of this article. It is enough to say here that the partial industrialisation process which developed during the postwar upswing been halted, apart from the Asian Tigers, and in some countries partly reversed. In order to pay the interest on their debts, even after rescheduling, many countries of Latin America, Africa, and Asia have had to revert to concentrating on the production of raw materials and food products, despite the massive fall in commodity prices, to pay off their debts. This is a turn back to the direction of the old colonial division of labour of the nineteenth century, in which the underdeveloped countries exchanged their primary products for manufactured goods from the advanced capitalist countries – on unfavourable terms of trade.

Today, the character of the short-term economic cycle cannot be understood apart from the development, over a longer time scale, of a new depression in the world economy. Successive recoveries have a feeble, uneven character, while successive downturns are likely to be increasingly severe. “The downturn of the early 1990s has been a depression,” writes James Davidson, “but not yet one with a capital ‘D’. Only Britain amongst the advanced countries has experienced a fall in output as severe as that of the 1930s, and only in Scandinavia has unemployment reached the extreme levels seen in the deepest stage of the Great Depression. If this is a depression, as I believe, the worst is yet to come”. (Wall Street Journal, 11 February, 1993).

In contrast to the superficial optimism of the politicians, who have to woo voters, the serious bourgeois strategists look to the future with foreboding and dread. They understand that the inability of capitalism to secure growth and prevent the rise of mass unemployment is a certain recipe for social conflict and political struggles. Few of them pretend to have any real solutions. They hope to ‘muddle through’, preparing in the event of deep crisis to defend their wealth and power regardless of the cost to working people. For the working class, therefore, the prospect of a Great Depression poses an urgent historical challenge: sharpen the ideas, build the organisations, and work out the strategy and tactics required to sweep away this organically diseased system.