Fifty years ago, on Tuesday 29 October, the boom in the price of stocks and shares on the New York stock exchange came to an abrupt end in what has gone down in history as the Great Crash.
Stocks and shares are titles to ownership of part of a business. They entitle their owners to a percentage of the profits of that business in the form of dividends or, in the case of certain kinds of shares, fixed interest payments. In theory the price of a share reflects the value of the firm's assets. In practice it fluctuates with the firm's profit-making record and expected profits. It is this latter that introduces an element of gambling into shareholding, since the firm can never know in advance whether or not it will in actual fact make the hoped-for profits. If it doesn't then the price of its shares will fall and the shareholders will suffer a loss. If it does then the price of its shares will increase and the shareholder will receive a capital gain as well as a dividend.
A stock exchange boom is essentially a period of speculation for capital gains on rising share prices. It need have nothing whatsoever to do with the profit-making record or prospects of the firms whose shares are traded. It is enough that there is a sustained excess of buyers over sellers on the stock market. With prices continually rising, capital gains can be made simply by buying shares one day and selling them the next. A telephone call is all the effort required.
Until October 1929 there was such a boom on the New York stock exchange. Share prices were rising, and everybody expected them to go on rising. Stories of people 'getting rich quick' from buying and selling shares encouraged others to try their luck. Actually, as long as the boom continued it was not a question of luck at all but a matter of having money. If you didn't have ready cash, you could borrow the money to buy the shares. Certainly you needed some collateral, but there were cases of shares already bought on loans - and even of the shares to be bought by that loan — being accepted as collateral.
The trouble with a speculative boom of this sort is that it cannot go on for ever. Sooner or later the excess of buyers over sellers must disappear. Everybody knows this, but investors can't resist the temptation to make easy money.
The Great Crash was followed by a severe industrial depression, summarised by J.K. Galbraith in his very readable book on the subject:
“After the Great Crash came the Great Depression which lasted, with varying severity, for ten years. In 1933, Gross National Product (total production of the economy) was nearly a third less than in 1929. Not until 1937 did the physical volume of production recover to the levels of 1929, and then it promptly slipped back again. Until 1941 the dollar value of production remained below 1929. Between 1930 and 1940 only once, in 1937, did the average number unemployed during the year drop below eight million. In 1933 nearly thirteen million were out of work, or about one in every four in the labour force. In 1938 one person in five was still out of work. (The Great Crash 1929, Pelican, p. 186.)
One school of thought, the monetarists, sees the Great Crash and Great Depression as the outcome of government interference in the 'natural' workings of capitalism. According to them, the stock exchange boom and its inevitable crash were caused by the monetary policy pursued by the US government and central bank (the Federal Reserve Board). What gives monetarist explanations of this crisis, and of crises in general, a semblance of plausibility, is the fact that monetary bungling can aggravate a crisis. And there is no doubt that in the years up to 1929 the Federal Reserve Board, in pursuing a cheap money policy with easy credit and low interest rates, did encourage the stock exchange boom, and so helped make the crash all the greater when it came. A stricter monetary policy might have cut short the boom at a much earlier stage and thus prevented so great a crash, even if not a minor one, but the question is: would it also have avoided the Great Depression?
Here the answer must be no. For a slowing down of economic activity was evident in the summer of 1929, some months before the Crash (a knowledge of this must have been a factor in bringing the stock exchange boom to an end). This downturn was particularly evident in the consumer goods sector, where the firms concerned had overestimated demand and were finding themselves lumbered with excessive stocks. In other words, the depression was going to happen anyway, whether or not there had been the stock exchange boom and crash. More fundamental economic factors were at work than speculations on the stock market or the monetary bungling of the Federal Reserve Board.
An attempt to identify these fundamental economic factors using the categories of Marxian economics has been made by Sydney H. Coontz in Productive Labour and Effective Demand (1965) and by Ernest Mandel.
A depression is the result of an unbalanced growth of one sector of the economy having expanded too fast for the other sectors. Simplifying matters, the economy can be divided into two main sectors, the one producing means of production (sometimes called 'capital goods' or, more accurately, 'producer goods'), and the other producing consumer goods. The conditions for steady, balanced growth under capitalism can then be stated to be:
“The purchase of consumer goods by all the workers and capitalists engaged in producing capital goods must be equivalent to the purchases of capital goods by the capitalists engaged in producing consumer goods (including in both categories the purchases needed to expand production). The constant reproduction of these conditions of equilibrium thus requires a proportional development of the two sectors of production. The periodical occurrence of crises is to be explained only by a periodical break in this proportionality or, in other words, by an uneven development of these two sectors.” (Mandel, Marxist Economy Theory, Vol.1, p.349.)
What happened in America in the 1920s was that the producer goods sector expanded too fast for the consumer goods sector. Production and productivity increased while wages and prices remained comparatively stable. Wages did in fact rise, but the main benefits of the increase in productivity went to the capitalists in the form of increased profits. Most of these additional profits were reinvested in production (though some found their way to the New York stock exchange). It was this that led, according to figures quoted by Galbraith, to the rapid extension of the producer sector as compared with the consumer goods sector:
“During the twenties, the production of capital goods increased at an average annual rate of 6.4 per cent; nondurable consumers' goods, a category which includes such objects of mass consumption as food and clothing, increased at a rate of only 2.8 per cent.” (pp. 192-3)
An expansion of the producer goods sector at a faster rate than the consumer goods sector is not in itself a situation of disproportionate development. Indeed, it has been precisely the historical role of capitalism to build up and develop the means of production at the expense of consumption. But so-called 'production for production's sake' cannot in practice continue indefinitely, since it demands either a sustained series of new inventions and innovations or a continually expanding market for consumer goods.
The relatively full employment in America in the 1920s — unemployment was officially only 0.9 per cent in 1929 — did mean that the market for consumer goods expanded, but the falling share of wages and salaries in National Income meant that this was not going to continue. The expansion of the producer goods sector levelled off, further retracting the market for consumer goods since its workers now had less to spend. Expressed in terms of the formula for balanced growth stated above, the purchase of consumer goods by the workers (and capitalists) in the producer goods sector had come to be less than the purchase of producer goods by the capitalists in the consumer goods sector. In other words, an overcapacity had developed in the consumer goods sector, which expressed itself in an overproduction of consumer goods and the build-up of stocks. As Coontz puts it (using the language of academic economics):
“. . . stagnation in the capital goods industry, the displacement of labour in this sector, meant that worker and entrepreneurial consumption expenditures failed to rise pari passu with investment in the consumer sector. It was this disproportionality that generated the Great Depression.” (p. 154)
The Great Depression — which occurred all over the world and not just in America — was not an accident, but simply capitalism working in a normal way. It exposed capitalism for the irrational, anti-social system that it is. While millions were unemployed and reduced to bare subsistence levels, food was destroyed because it could not be sold profitably. It was in the 1930s that the Roosevelt administration introduced the notorious policy of paying farmers not to grow food, a policy accurately described by a later President, Kennedy, as 'planned underproduction'. Even in limes of boom and prosperity capitalism underproduces, but in times of depression this is even more flagrant.
The Depression eventually came to an end — with the war and preparations war.
(Socialist Standard, October 1979)