While the coming of the Second World War had returned the United States to full employment, this was only by way of government deficit-financed spending for arms production, not because of the revival of the private-enterprise economy. Peace, with the decline in war work and the demobilization of millions of soldiers, brought a sharp decline in industrial production and a rise in unemployment; by 1946, however, a strong upward movement was clear. Capital expenditure, to replace and modernize industrial plant, rose from $7 to $20 billion between 1945 and 1948; there was also a significant increase in commercial, industrial and residential building. At the same time, the US became the world’s leading exporter, both of goods and of investment capital, particularly to European countries.1
Europe, meanwhile, had ended the war in a state of ruin. Within a few years, however, the European economy was reviving: while in 1945 ‘industrial production was barely 40 percent of prewar levels in Belgium, France, and the Netherlands, and less than 20 percent in Germany and Italy’, two years later it exceeded 1938 levels, except for western Germany, where the occupation forces still kept efforts to restart industry in check.2 With the start of the Cold War and America’s desire for ‘a vibrant and prosperous European economy to provide a bulwark against the Soviet Union’,3 Germany was not only allowed but vigorously aided, notably by the Marshall Plan, to retake its place as the economic centre of Europe. Recovery throughout Europe ‘was driven by spending on industrial capacity’, with priority given to heavy industry. Meanwhile, ‘trade unionists and the left, extending even to Communist Party hardliners, approached postwar reconstruction as a national effort comparable to the resistance’, keeping wages low and working conditions hard.4 In Japan, also seriously damaged physically and economically by the war, American aid played an important role in powering the post-war revival, especially with the coming of the Korean War.5 Here too wage restraint and industrial investment were key factors in the rapid production of a ‘miracle economy’.
Thus, despite the particular features of the Great Depression, most importantly the war into which it opened, the post-1945 revival of the capitalist economy followed, in broad outline, the pattern set in previous episodes of economic collapse and regeneration – the pattern to be expected in a society regulated by money profit. The depression had been long-lasting and the level of physical and economic destruction of capital unusually high; it is not surprising therefore that the revival led to an exceptionally long prosperity. In Angus Madisson’s words, ‘The years 1950 to 1973 were a “golden age”’, which saw ‘a growth of GDP and GDP per capita on an unprecedented scale in all parts of the world economy, a rapid growth of world trade, a reopening of world capital markets and possibilities for international [labour] migration’.6 This is not an idiosyncratic view: all commentators agree on describing this period as an unusually prosperous period for capitalism.
The exceptional length of the Golden Age, which, as a historian of the American economy put it, ‘went on steadily through mild recessions instead of exhausting itself after a few years’,7 was due also to the continuation into the post-depression period of what had by then come to be called Keynesian methods. If capitalism remained at base the same system, the economic policy practiced by governments had changed. On the one hand, the political dangers threatened by the social movements unleashed by the Great Depression, when mass unemployment radicalized the population, were unacceptable to the governing elite of the capitalist states, especially in the context of what was believed to be an epic confrontation with Communism.8 On the other hand, it was also imagined that Keynesian methods of deficit financing could definitively control the ravages of the business cycle, moderating economic declines until the tendency towards growth supposedly natural to the economy could reassert itself.
As a result, Maddison observes, a ‘major feature of the golden age was the substantial growth in the ratio of governmental spending to GDP’, which ‘rose from 27 per cent of GDP in OECD countries in 1950 to 37 per cent in 1973’.9 In most countries this was due largely to increases in welfare-state spending on such matters as social security, education and healthcare. In the United States it included sizeable sums spent on war and preparations for war. In the words of economist Philip A. Klein, writing for the conservative American Enterprise Institute, ‘America’s “longest peacetime expansion” – from 1961 to 1969 – was influenced greatly by the redefinition of the term “peacetime” to include the Vietnam War and the increase in defense spending from $50 billion in fiscal year 1965 to $80 billion in fiscal year 1968 . . .’.10 This American expansion in turn helped power global growth, notably by way of the revival of Japan and the take-off of Korea, particularly stimulated in the Vietnam War period.
In other words, the capitalist economy proper – the private enterprise system – was, even after the profit-restoring effects of a depression lasting from 1929 to 1945, not by itself able to produce a level of well-being sufficient, in the eyes of social decision-makers, to achieve a politically desirable level of social contentment. Thus, for example, when a Republican government, acting on its anti-New Deal, pro-free enterprise ideology, cut defence spending after the end of the Korean War in 1953 without adding offsetting increases in domestic expenditure, the United States experienced a sharp drop in production and a correspondingly sharp increase in unemployment. Despite its wishes, the Eisenhower administration quickly acted to lower interest rates and increase government spending, including on public works as well as on directly military projects.11 In the United States, in fact, political economist Joyce Kolko noted in 1988, ‘roughly half of all new employment after 1950 was created by state expenditures, and a comparable shift occurred in the other OECD nations’.12 In this way, post-war government spending on military and civilian projects increased the demand for goods and services, creating prosperous conditions despite the limitations of the capitalist economy.
Keynes’s idea had been that the government would borrow money in times of depression to get the economy moving again; when national income expanded in response, it could then be harmlessly taxed to pay back the debt. In reality, crisis management turned into a permanent state-private ‘mixed economy’. After the mid-1970s, throughout the capitalistically developed countries, national debt, far from being repaid, grew, both absolutely and in relation to GDP. This growing debt made itself felt in a tendency towards inflation, as businesses increased prices (and workers tried to catch up) to offset the rising chunk of national income taken by government. In particular, the inflation stimulated as the US Treasury printed dollars required for the debt-financing of American government operations spread through the world, given the post-war role of the dollar as a global reserve currency.
Under the post-war arrangement entered into by the world’s capitalist nations (the Bretton Woods system), the dollar, representing a fixed amount of gold, served as a standard against which the value of other currencies could be measured, thus facilitating international trade and investment. By 1971, so many dollars had been created to pay for American wars and domestic programmes that the US had to sever the dollar’s tie with gold to avoid the possibility that Fort Knox might be emptied as other nations cashed in their greenbacks. Despite the opinion of many, this did not basically alter the nature of money, which had long functioned largely on the basis of credit and state fiat money. But it did signal how far the world economy had moved from the self-regulating mechanism imagined by free-market enthusiasts towards a system dependent on constant management by governmental authorities – and one in which the relaxation of management, or the limitations on its reach, would make way for dire developments.
In fact, despite the panoply of governmental interventions and ‘automatic stabilizers’ set in place to keep the economy on an even keel, the Golden Age came to an end in the early 1970s. World growth slowed dramatically, with declining rates of investment and productivity and increasing unemployment. At the time this recession was commonly blamed on the ‘shock’ of a rapid rise in oil prices, engineered by the OPEC countries in collusion with oil companies, in an effort to increase their share of the world’s profits and to offset the fall in the value of the dollar, the currency in which oil prices are set. But the fact that growth on the earlier scale did not resume when the world economy adjusted to this change, and even when oil prices declined again, indicates that some more fundamental alteration in the global economy was underway.
Warning signs had been visible for a while. As economist William Nordhaus observed in an article published by the Brookings Institution in 1974, ‘by most reckonings [US] corporate profits have taken a dive since 1966’, even taking into account the record profits of the oil companies in 1973. ‘The poor performance of corporate profits is not limited to the United States’, he continued. ‘A secular decline in the share of profits has also occurred in most of Western Europe.’13 Once again a boom, with its attendant increase, relative to labour, in capital invested in means of production had led to declining profits and so to an end of prosperity – although the turning point to which this process led by 1974 once again took on a hitherto unknown form.
It is not surprising, in view of the history of the business cycle, that the post-war period of prosperity came to an end in the 1960s. But the end of the Golden Age did not lead, as some at the time feared it would, to a crisis and depression of the traditional sort, just as the level of social wellbeing had been maintained after the war despite the limitation of economic growth. In Europe, ‘public expenditure rose from 38 percent of [GDP] in 1967–69 to 46 percent in 1974–76’, with spending, above all on transfer payments and social programmes, ‘especially rapid in Germany, the Netherlands, Denmark, and Sweden’.14 In Japan, government spending rose from 19.3 per cent of GDP in 1970 to 27·3 per cent in 1975 and 32.2 per cent in 1980. In the United States, where the index of industrial production dropped at a 24.8 per cent annual rate between September 1974 and March 1975, while employment fell at a 6.7 per cent annual rate, a major depression was averted by a massive increase in government spending, from $264.8 billion in 1973 to $356.9 billion in 1975 (it had been $40.8 billion in 1950). Between government purchases of goods and services, both civilian and military, and transfer payments to households, the effect was a rapid infusion of cash into the economy that showed up in household consumption and in ‘a rise in corporate cash flows’.15 At the same time, the financial aspect of the crisis – the 1974 failure of the multi-billion dollar Franklin National Bank and the serious difficulty of other banks – were contained by the actions of the Federal Reserve and other government institutions acting as lenders of last resort.
Instead of a new depression, therefore, the world’s capitalist economies experienced a short, though serious, recession. But, confirming the idea that depressions are the cure for the insufficient profitability that produces them, the use of government funds to limit the extent of the downturn meant that the following prosperous period was also limited. In Tom Kemp’s description,
The clearing of ground for recovery by a downward revaluation of assets and the lowering of costs, thus restoring the profitability of capital, did not happen in the classic manner. What did happen . . . was that plants that proved unprofitable in the recession [of 1974–5] did not reopen in the boom; ‘de-industrialization’ had begun.16
Government spending reappeared as corporate profits, as well as in the form of income (transfer payments), to be spent on goods and services produced by private businesses. But these profits – matched in national balance sheets by surging government debt and fiscal deficits – were not produced in the private sector (the capitalist economy proper), from which in fact they were taken in the form of taxes and loans. Since the earlier decline in profit rates had been counter acted rather than overcome, it is not surprising that corporations used the funds available to them less for building new factories to produce more goods than for squeezing more profit out of existing production by investing in labour-and energy-saving equipment while labour costs were lowered by moving plants from high-wage to low-wage areas or simply by using the threat of such moves to cut wages and benefits. (The results of this included a lasting increase in unemployment in Western Europe and in what became the Rust Belt of the US.)
Of course, the widely observed workplace speed-up, dismantling of occupational safety measures and extension of the work week, along with increasing employment of part-time and temporary workers, also helped lower the average wage and so increase profitability. Between 1970 and 1985, average annual wage growth in the United States declined from more than 12 per cent to around 4 per cent. Between wage stagnation and inflation average weekly earnings declined by 14.3 per cent between 1970 and 1986, while median household income dipped by about 6 per cent between 1973 and 1986;17 household incomes were maintained to the extent they were only by the massive entrance of married women into the labour force. Especially in the US, the steadily increasing facilitation of consumer debt – from credit-card financing to easy-to-get mortgages – that helped maintain the level of business activity was also another means, like inflation, to lower wages by raising prices: the additional cost of items is collected by financial institutions under the name of interest. Pension plans made part of workers’ earnings available for use by brokerage firms, banks and other financial institutions; in the United States, their replacement by the personal stock-investment plans called 401(k)s, like the weakening or elimination of job-linked healthcare plans, further diminished labour costs.
Starting in the 1980s, spending on the socialized wage payments constituted by welfare-state programmes was cut in all countries, to different extents depending on local political conditions, freeing up money for corporate use. The restructuring of tax laws to transfer income from workers to high-income recipients, practiced most extravagantly in the United States,18 cut wages directly, in a decades-long process theoretically justified by the ‘supply side’ theory that capitalists’ mere possession of increased amounts of money will lead to its investment, however low profit expectations may be. In reality none of this, given the high level of existing investment in means of production relative to labour costs, was enough to restore a high level of profitability. As a result, in the words of a recent survey of the period,
Between 1973 and the present, economic performance in the US, western Europe, and Japan has, by every standard macroeconomic indicator, deteriorated, business cycle by business cycle, decade by decade (with the exception of the second half of the 1990s). Equally telling, over the same period, capital investment on a world scale, and in every region besides China, even including the east Asian [Newly Industrializing Countries] since the middle 1990s, has grown steadily weaker.19
The slowdown in productive investment meant that money was increasingly available for other purposes. Corporations began to spend vast sums they might earlier have used to expand production to buy up and reconfigure existing companies, selling off parts of them for quick profits and manipulating share prices to make money on the stock market. In the late 1980s, it has been calculated, about 70 per cent of the rise in the Standard & Poor’s index of American stock values was due to the effects of takeovers and buy-outs;20 over the next twenty years the excess of stock prices over the underlying values of the companies they represent continued to grow. Thus the merger and acquisitions boom of the 1980s shaded into a larger pattern of speculating in financial markets rather than investing in productive enterprises. To take just one area of speculation, the value of funds involved in currency trading – buying and selling different national moneys to take advantage of small shifts in exchange rates – rose from $20 billion in 1973 to $1.25 trillion in 2000, an increase far greater than the growth in trade of actual goods and services.
Avenues for speculation were multiplied by the invention of new ‘financial instruments’, such as derivatives, swaps and the now infamous ‘securitization’ of various forms of debt, including home mortgages. (For an idea of how far the imaginative mirroring of actual invested money by the creation of new saleable claims to it went, consider the fact that by the time of the crisis of mid-September 2007 the world’s estimated $167 trillion in financial assets had given rise to $596 trillion in derivatives, basically bets on the future movements of asset prices.)
This ‘massive shift toward speculative uses of liquidity . . . expressed itself in a strong push to legislative deregulation . . .’.21 Deregulation, that is, was a response to the pressure to speculate; though of course it made risk-taking easier; it was not the cause of increased speculation. Similarly, to explain the rise of debt-financed acquisitions and other modes of speculation as the effect of greed, as is often done today, is doubly silly: not only does it leave unexplained the sudden increase of greediness in recent decades, but it also ignores the basic motive of capitalist investment decisions, which must always be guided by the expected maximum profits achievable in a reasonably short term. Similarly to the way that playing the lottery, despite its multimillion-to-one odds, represents the most probable path to wealth for the average worker, speculation simply came to offer businesspeople better chances for higher profits than productive investment.
Along with speculation, the low level of profitability led to steady growth of corporate debt, especially as the inflationary response to government spending encouraged borrowing, since the falling value of money lowered interest costs. In the United States, companies had traditionally financed expansion out of their own profits, but in 1973 corporate borrowing exceeded internal financing and this was only the beginning. (Around the same time France saw a US-style move to borrowing, the traditional mode of corporate financing in Germany.) The increasing uncertainty of economic affairs led in particular to a growth in short-term debt, though this in itself helped produce a rising rate of corporate bankruptcies, as sudden fluctuations of fortune could make it impossible to repay loans in short order.
To a large extent, especially since the 1980s, the ‘globalization’ of capital is part of this pattern of growth in speculation and debt. The last quarter-century has certainly seen a worldwide expansion of production and trade and the re location of some production operations to a few low-wage areas.22 But, like domestic investment, the export of capital – which in any case has remained overwhelmingly within the capitalistically developed economies of the OECD – has been largely driven, in the words of Paolo Giussani, ‘by sectors more or less directly tied to finance and short-term speculation’.23 As a recent OECD study reports, foreign direct investment (FDI) became ‘increasingly dominated by service industries and mergers and acquisitions (M&AS)’, so that ‘manufacturing’s share of global FDI inflows fell from 41% in 1990 to approximately 30% in 2005’, and by 2006 M&AS ‘accounted for two-thirds of all FDI inflows, although these levels were slightly below the record levels of 2000’.24
Between 1971 and 1976 the number of international branches of the world’s 50 largest banks grew by more than 60 per cent. American banks in particular increased their global presence; the foreign share of Citicorp’s banking activity, for example, expanded from 40 to 70 per cent. ‘In this way a gigantic financial structure emerged, free of control by central banks and from the costs of reserve requirements, with an autonomous capacity to increase liquidity.’25 Dollars poured into this structure when the US balance of payments became increasingly negative as the American government made use of the reserve-currency character of the dollar to pay for its increasing expenses and ‘petrodollars’ accumulated in OPEC countries. But already by 1980, when world dollar deposits were less than $50 billion, bank-gene rated credits (that is, money lent on the assumption it will be repaid before the bank has to meet its own liabilities) surpassed $223 billion.
The 1970s had seen rapid growth in lending to underdeveloped countries, as commercial banks replaced governmental and international agencies as the main sources of borrowed money. Between 1975 and 1982, notably, Latin American debt to commercial banks grew at a rate of over 20 per cent a year. Debt service grew even faster, as refinancing piled interest charges on interest charges. The result was a series of debt crises that wracked Latin America after the early 1980s. One consequence was the abandonment of internal economic development projects in these countries in favour of the export-oriented economic strategies demanded by the international economic authorities (the World Bank and International Monetary Fund) that oversaw the restructuring of debt. A similar fate was in store for loans advanced to the centrally planned economies of Eastern Europe. Their disastrous entanglement in debt, which seemed originally to provide a way out of the declining fortunes of the state-run systems, was an important step towards the integration of the former ‘communist’ world into the global capitalist system. (I remember, fifteen years ago, suggesting to a Hungarian dissident, György Konrád, who had just finished ex tolling integration into the world market as a solution for his country’s problems, that the East might be joining the West just as the capitalist economy’s happy days were over; he replied that he had finally met in me someone more pessimistic than a Hungarian.) By 1984, America joined this club, taking in more foreign investment than it exported, and a year later the US became a net debtor. It gradually turned into the world’s largest recipient of investment and the world’s largest debtor, seriously dependent on foreign lending to finance both its wars and its unhinged consumption of much of the world’s production.
In all these ways, then, debt – promises to pay sometime in the future – took the place of the money the slowing capitalist economy failed to generate. Since governments, businesses and, to an ever-increasing degree, individuals used borrowed funds to purchase goods and services, public, corporate and household debt appeared on bank and other business balance sheets as profits. Such a state of affairs is necessarily unstable, open to disruption by forces ranging from the speculative activities of individuals, as when George Soros forced a devaluation of the British pound in 1992 (earning an estimated $1.1 billion in the process), to the decisions of scores of businesses to move money in and out of national and regional economies, as when the weakening of the Thai real estate market in 1997 led to the collapse of the Thai currency, the baht, and then to credit crises in places as distant as Brazil and Russia. The worldwide stock market crash of October 1987 produced the largest vaporization of virtual values in United States history, reminding observers of the Wall Street crash of 1929 and prefiguring the meltdown of 2008.
The maintenance of low interest rates by the Federal Reserve enabled the rise and fall of the dot-com bubble in the US between 1995 and 2001, as investors financed internet-based companies that were supposed to ride the crest of a new, information technology-enhanced economy. A similar frenzy developed in Europe with the debt-based development of mobile phone networks in Germany, Italy and the United Kingdom. The crash of stock-market values sent $5 trillion of investors’ money up in smoke between March 2000 and October 2002. Seeking new avenues for speculation, invest ors turned to the housing market; as economist Robert Schiller noted already in 2005: ‘Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed. Where else could plungers apply their newly acquired trading talents?’26
Throughout the 1990s, the deeper reality at the bottom of the wild swings of speculative fortune – the insufficient profits earned by money invested in production, relative to the level of economic growth required to incorporate the world’s population into a prosperous capitalism – showed itself in such phenomena as the depression, born of the fizzling of a real-estate bubble, that has afflicted Japan since 1990; the continuing high unemployment in relatively prosperous Europe; the stagnation of the American economy, with falling wages, rising poverty levels and dependence on constantly increasing debt – personal, corporate and national – to maintain even a simulacrum of the fabled ‘American standard of living’; the continual slipping back into economic difficulties of the nations of Latin America, despite periodic (though uneven) successes in mastering them; the relegation of most of Africa, despite its vast natural resources, to unrelenting misery except for the handful of rulers salting away the proceeds from oil and mineral sales in Swiss banks; the analogous limitation of Russian capitalism to the machinations of former party apparatchiks-turned-millionaires; and the historically unprecedented accumulation of hundreds of millions of un-or under-employed people in gigantic slums around the world. This is the reality that has persisted beneath the alternating contractions and expansions, the debt crises and their temporary resolutions, the currency collapses and financial panics that have shuttled from one part of the world to another over the last 30 years.
The result was the economic situation that arrived so shockingly in 2007, though for several decades the warning signs – debt crises, recessions, bank collapses, stock market failures – were clear enough. Generally ascribed to lax regulation, greed or bad central-bank policy, the current economic collapse is in line with the whole history of capitalism as a system. What we are faced with today is a further, more serious manifestation of the depression that first announced itself dramatically in the mid-1970s, but which governmental economic policy was able hold at bay – in part by displacing it to poor parts of the world, but largely by a historically unprecedented creation of public, private and individual debt, in the rich parts – for 30-odd years. Perhaps its full force can be further delayed with additional infusions of credit. It is also possible that the ongoing unravelling of the world economy, most visible at the moment in such different areas as Greece, Ireland, Britain and Japan, will continue, with more dire consequences than we have yet seen. What can – and cannot – be done?