Chapter Six
The Great Depression and the New Deal
Although all capitalistic crises are basically the same, each one varies with respect to its initiation, its length and depth, and the reactions evoked by it. It is the changing capital structure itself which accounts for these variations. Since capitalism is composed of numerous nation-states of dissimilar configurations but operates on a global scale, the international crises affect different countries differently. The economic crisis of 1 929 differed from all preceding crises not only in its greater impact on the world economy but also in its political repercussions and their effects on capitalism's further development. It is thus necessary to refer to both the identities and the dissimilarities, as well as to the abstract reasons for and their concrete appearances in any particular crisis, even though all crises are grounded in the capitalist system as such.
The crisis of 1929 came as a great surprise to the Americans. But this was so only because preceding crises had rather been forgotten or were referred to as occurences of the irrevocable past, and also because the lack of a general theory of capitalistic development forbade the recognition of the crisis mechanism as the basic "regulator" of the capitalist economy. To be sure, there were business-cycle theories1 based on empirical evidence. However, they were more of a descriptive than explanatory nature and were generally regarded as aberrations, leaving the rule of standard theory - that is, the theory of the automatic self-adjustability of the market - unaffected. At any rate, the relevant discussions were of a strictly academic character and did not reflect a more general awareness of the contradictions inherent in capitalist production. And this the more so because in principle, as well as for lack of necessary data, there is no way to predict the rise of a crisis that changes a period of prosperity into one of depression. All capitalist actions are, at all times, merely reactions to blindly operating, uncontrollable changes in the socioeconomic relations that underlie the capitalist system and affect it either positively or negatively. low level, although a crisis is unpredictable as to the time of its arrival, certain market phenomena indicate its possible approach..
Capitalist prosperity depends on the expansion of capital. Due to the fact of profit production, it is obvious that total social production requires the accumulation of capital to employ the Same or an increasing number of workers. Only a part of the total social product falls to the working class; another part serves the consumption needs and the competitively enforced accumulation requirements of the capitalists or capitalist corporations. When the part of the social product earmarked for accumulation is reinvested in additional capital, implying its profitability, there exists a state of prosperity, with a minimum of unemployed labor and the maximum utilization of the means of production. In brief, prosperity depends on the rate of accumulation which, in turn, depends on (lie given profitability of capital. However, the latter is determined not only by the rate of labor exploitation but also by the mass of profit in relation to the expansion requirements of the already accumulated capital. The same or even an increased rate of exploitation may not suffice to yield a mass of profit conducive to further capital expansion. The consequent arrest or reduction of investments initiates the crisis and the depression in its wake..
There is no need here to dwell on this matter, the less so because everyone dealing with it is agreed on the need for capital investments to overcome depressions or to secure a state of prosperity. Whatever the particular depression theory, be it one in terms of overproduction, underconsumption, or market disproportionalities, all recognize the need for the resumption of capital expansion as a precondition for a "normal" economic development and social stability. In practice, at any rate, it is the restoration of a lost profitability that concerns all capitalist reactions to the crisis situation..
Although not recognized as such, the crisis of 1929 was actually a continuation of the unresolved economic crisis preceding World War I. This crisis had been sidetracked by the war, so to speak, even though the war was itself the political expression of the crisis. The rapid industrialization and capital formation of the Central European powers had demanded a larger share of world exploitation, while the older capitalist nations could only defend their privileged positions through their own continuous expansion, regardless of the capitalization needs of other countries. Since the war was fought for relative shares in world exploitation, it involved all nations either directly or indirectly. Since it ended with the defeat of the Central European countries, it led to a reorganization of the international power structure, with America becoming the leading capitalist nation..
This reorganization affected all European nations negatively a point not seen at once. For America, however, war production had provided a great impetus for capital expansion, fully justifying President Wilson's anticipations when, in 1 9 1 6, he told his fellow-citizens that "we must play a great part in the world whether we choose it or not. We have got to finance the world in some important degree and those who finance the world must understand it and rule it with their spirits and their minds. "2 The temporary eclipse of European competition gave the United States a foothold on formerly inaccessible shores, and the anarchic conditions of devastated Europe helped to secure the newly won positions. America turned from a debtor into a creditor nation, and her rise to economic dominance changed all existing international relations. America's postwar prosperity was based on a productive apparatus built to support a worldwide war. The accelerated capital expansion had enough momentum to continue long beyond the existence of the conditions that had been its cause. But finally America, too, succumbed to the postwar realities, and her expansion came to a halt in 1929, not again to be resumed on any significant scale until World War II. The Great Depression had its "start" in America only because in other countries the postwar depression had never really ended. But the American collapse led these nations into even deeper decline and disorganized trade relations almost to the point of extinction. There was no profit in further expansion, and there was no way to organize the economic world structure in accordance with the profit requirements of a general resumption of the accumulation process..
Prior to 1 929 depressions were of a deflationary nature, that is, the "laws of the market" were allowed to run their course, in the expectation that sooner or later the supply and demand mechanism would regain a lost equilibrium, restore the profitability of capital, and thus assure its further development. The war economy itself however, was an inflationary process, as the increasing indebtedness of governments pressed upon the profitability of capital. The increased production had been for "public consumption," destroying men, materials, and machines and delaying the production of the profitabe means of production on which the expansion of capital depends. In a "purely" economic depression the deflationary process merely destroys capital values, through bankruptcies and lowered prices, without seriously affecting their physical counterparts, the means of production. The resulting shift of value relations that is. the changed distribution of the socially available profit among the capitalist firm's will in time provide the surviving capital entities with a higher rate of profit arid thus with incentives for new investments. The capitalistic concentration and centralization process plays a greater mass of profit into the hands of fewer capitals, thereby improving their chances to resume their expansion on the basis of an altered capital structure, which allows for an increase in the productivity of labor and a profitable accumulation. The destruction of capital values during an ordinary depression is thus a precondition for a new economic upswing, which is to say that the deflationary process is an indispensable requirement of capital development..
The war economy, however, is of an inflationary nature. Capital values are sustained in the form of the public debt. The post-war depression of the European economies was thus characterized by monetary inflation in order to eliminate the public debt and to change the distribution of the social product in favor of capital. The inflationary measures varied in different countries in accordance with both their economic health and their monetary policies. The 'richer nations attempted, at first, to restore the international gold standard suspended during the war in order to maintain, or renew, their prewar positions in the international credit and investment markets. But the recovery of the European economies was far too slow to achieve social stability and a level of economic activity sufficient to promote another period of general expansion. In contrast, and after a short-lived depression in 1921, the American economy prospered to an extent unknown at any other time. Prices remained relatively stable, profits increased, the labor force expanded, and the new inventions automobiles, telephones, radios, refrigerators, etc. -- found continually expanding markets..
however, for both internal and external reasons the American prosperity could riot last. Although America's dependence on foreign trade is less than that of other capitalist countries, it is there nonetheless, as the expansion of capital implies the extension of markets through capital and commodity exports. This, of course, requires the ability of other nations to buy American goods, that is, their own ability to sell on the American market, But the war and the ensuing European stagnation had led to a further disintegration of foreign trade, which was already greatly hampered by protectionist policies and important differentials in labor productivity. Though not immediately perceivable, the sail state of the European economies was bound to affect America's prosperity, for, just as every major crisis arising somewhere spreads over the whole globe, so a state of prosperity cannot be maintained in isolation from the rest of the world..
Assuming capitalism were a closed system, it would reach its limits at that point of development where the number of workers and their productivity as determined by the accumulation of capital would not yield profits large enough for its further expansion. At such a point accumulation, and therewith the system itself would come to a halt. The fact of continuous accumulation in the real capitalist world shows that these abstract limits have not been reached, while the recurrent crises indicate the existence of these limits, which come concretely to light in the interruptions of the expansion process. It is then a question of adjusting the profitability of capital to its expansion requirements which determines the state of the economy. As long as these adjustments can be made in the sphere of production, via the market relations, it is possible, although not certain, to overcome the immanent barriers to the production of capital. With respect to the American prosperity that preceded the crash of '1 929, the emerging discrepancy between the possible rate of labor exploitation and the objectively required rate of expansion necessary to sustain the conditions of prosperity showed itself in the increasingly speculative character of this prosperity and in the enormous expansion of the credit system..
The American prosperity was largely and increasingly based on fictitious profits and fictitious capital, "created" on the stock market, which had no equivalent in real capital values and real profits. To some extent these fictitious values and their continuous expansion functioned just the same as an impetus for the further increase of production, even though this increase was not based on actual but on expected profits, which might or might not be realized. The increase in production, in turn, accelerated the speculative fever made possible through the availability of bank credits. Because from a capitalistic point of view it is quite immaterial for what particular purposes credits are extended, they will he used where they are the most lucrative. At the same time, however, credit expansion indicates a shortage of capital for the maintenance of a given pace of capital expansion. While credit itself can create nothing, it may prolong, or initiate, a scale of production that would have been far lower without it. It is for this reason that every crisis of capital is preceded by an extraordinary credit increase, by an effort, that is, to expand the level of production in order to maintain a given rate of p to fit. As the harbinger of an approaching crisis, the credit extension is also instrumental in the rapidity of the economic collapse when production fails to reach a level of profitability commensurable with the blown up mass of capital. In any case profits can only be made through production' and if they are not satisfactory with respect to the existing capital whether real or fictitious the claims based on them cannot be met and a part of the recognised capital ceases to be such. Although initiated by the stock market crash of 1929, the ensuing depression was not the result of mere speculation or of a false monetary policy promoting credit extension for speculative purposes. Both occurrences fell together with a slackening of the rate of investment due to declining profits in relation to the employed capital. It was rather this situation, the relative stagnation of productive capital, which led to the speculative boom, which could only enlarge the overall discrepancy between the profitability and the expansionary needs of the economy. Even without the artificial expansion of the market value of capital, the upswing was bound to come to an end, although, perhaps, this might have happened at some other time, with less dramatic impact and fewer disastrous consequences than those released by the stock market collapse and the disintegration of the banking system..
As it was, however, the crisis was blamed on the stock market, that is, on the unexplained loss of nerve at the first serious decline of the selling boom, which lowered or wiped out not only the inflated part of stock values but also part of the 'justified" market value of capital. Treated as a question of psychology, all that seemed necessary in this situation was to halt the decline of stock prices by the restoration of confidence in the workability and progressive unfolding of the system. But since "confidence" cannot replace money, the capitalists tried first of all to safeguard as much as possible of the money value of their stock by selling at any price, so long as buyers could be found. In a short time the stock market value of capital was reduced to half the size it had reached in 1929, leading to the collapse of many enterprises and financial institutions. Banks began to fail because their loans had served speculation instead of productive investments, and their failures led to runs on the banks for reasons both of fear and of necessity..
The productive apparatus of the nation was not affected by these happenings in its financial structure. The reduction of the market value of capital, as registered on the stock market, should have improved the profitability of industrial production, since it could now be related to a diminished mass of capital. The fact, however, that production declined even further demonstrated that the cause of the crisis was not to be found in the speculative boom but was rather the result of an already existing decline of the economy. This showed itself most drastically in agriculture, where prices had fallen to about half of their war-time height, not to rise throughout the 1920s. Industrial workers, as a whole, were not able during this period to teach what was officially considered the necessary annual minimum wage of $2,000. Though the demand for labor increased, it did not increase fast enough to offset the declining rate of capital expansion which, due to the rising productivity of labor, accompanied an increase of output of about 40 percent. But this was in the main output of consumer goods not destined for the expansion of capital-producing capital. That the existing rate of growth could still be regarded as a prosperous one was precisely due to the frozen wage level and the decline of farm prices, which bolstered the profitability of industrial capital and restricted the prosperity to a privileged minority. According to estimates of the Brookings Institution, "in the boom year of 1929, 78 percent of all American families had incomes of less than $3,000. Forty percent had family incomes of less than S I ,500. Only 2.3 percent of the population enjoyed incomes of over $1 0,000. Sixty thousand American families, in the highest income brackets, held savings which amounted to the total held by the bottom 25 million families."3 in the bourgeois view all production is destined for consumption and therefore determined by the consumers. Actually production is determined by its profitability. Its aim is the transformation of a given capital into a larger one, which can only be realized at the expense of consumption. If consumption were the rationale of production, there would be no accumulation of capital. There right be an expansion of the productive apparatus as a precondition for the expansion of consumption, but not the accumulation of capital as capital. No matter what a capitalist firm or corporation produces, it will always try for the largest difference between its production costs and the selling prices for its commodities. On the social level this implies that there is always a surplus product that does not enter into consumption but takes on the form of additional capital, unless it remains idle money capital. In the latter form, however, it can only comprise a fraction of the total of the unused capital, which finds its augmentation in idle production capacity, unsalable inventories, and a general glut on the commodity markets. With production frozen in the commodity form and unable to take on the money form, the capitalist crisis also manifests itself as an interruption of the circulation process and a general shortage of money. That is to say, the idle money, which cannot find profitable employment, comes to the fore as a general lack of money and a decreasing effective demand. And thus it seems that the crisis is caused by overproduction or its corollary, insufficient demand, whereas, actually, these are only market manifestations of an interrupted process of accumulation..
It is not enough, then, to enlarge the output of consumer goods, as happened during America's postwar prosperity, unless the larger output is accompanied by a corresponding extension of the productive apparatus through which the expansion of capital is materialized. The increase of consumer goods may be a consequence of accumulation, but it cannot be its source, since it depresses the profitability of capital by reducing the rate of accumulation. It was thus the boom in consumer durables, under conditions of relative capital stagnation, which provided one of the contradictions of the prosperity. Of course, this was not a question of economic policy but an expression of blocked investment opportunities due to the precarious conditions of the world economy. The rate of capital expansion depends on the mass of profit available after social consumption needs have been met. The less consumed, the more can be accumulated, and vice versa. But in the world at large production scarcely sufficed to assure the necessary consumption requirements, and profit rates were consequently low. It was the low rate of profit which prevented American capital exports through direct investment abroad. What capital export there was took the form of short-term credits, which could not be transformed into long-term investments. In fact, a great part of this capital returned to the United States via the reparation and allied-debt arrangements. While America financed the German reparations, the latter financed the allied war-time debt to the United States. This circular money flow could not enhance a general upswing and came to an end before capital stagnation turned into the Great Depression..
Of interest in this context was America's inability to expand its capital either internally or externally. Still, money had been made during the war, and was being made after it, to allow for a buying boom suggestive of a real prosperity, even though it was not based on the expansion of capital. But this could only be a temporary affair, not only because it was so largely based on credit, but also because profits did not rise with the increasing economic activity. It was a period often dubbed in retrospect a "pro-itless prosperity," which offered no incentives for further capital investments. Not only was the existing productive capacity able to accommodate the prevailing demand, but it was never fully used throughout this whole period. Production did not exceed the demand formed by consumption goods and was, by that token, capitalistically unjustifiable. There was no overproduction as yet because production had been curtailed to the given market demand, which did not include sufficient demand for new plants and equipment..
Socially this implied capital stagnation, which denies a part of capital, namely that part producing for expansion, its necessary profits. thereby reducing the general rate of profit for capital as a whole. To raise the rate of profit, as a precondition for the enlargement of capital, requires a restructuring of the whole of the economy. which leads to the profitability of a still larger mass of the total capital. To this end the reallocation of the social capital in a market economy is only possible by way of crises and depressions. But the crisis must first make its appearance on the surface of the market, even though it was already present in changed value relations in the production process. And it is via the market that the needed reorganization of the capital structure is brought about, even though this must be actualized through changes in the exploitative capital-labor relations at the point of production..
Before this happens the depression runs its course. After the stock market collapse production declined progressively, reducing the national income within three years to less than half of what it was in 1 929 Apart from enterprises disappearing altogether, production was generally cut, which led by 1932 to 15 million unemployed. Many of the employed workers were on half-time. To give a particular instance, industrial construction, which is an indicator for general production, declined from $949 million to $74 million; steel production was down to 12 percent of its capacity. Five thousand banks closed, wiping out close to 10 million savings accounts. Farm income, which amounted in 1929 to $12 billion, was reduced by 1932 to $5 billion. The price of crude oil, which had been $2.3 1 per barrel in 1 926, fell to 10 cents by the end of 1930. This list could be continued endlessly, for the crisis was all-inclusive and, with the exception of the really rich, affected all layers of society..
It was perhaps the very rapidity of the decline which stunned the population into a kind of disbelief in the reality of the crisis. This situation could not possibly last, it was thought, and would end as suddenly as it had come about. As in a natural catastrophe, all tried to rescue what was still savable; the entrepreneurs by cut-throat competition, the workers by accepting lower wages. The government of Herbert Hoover ceaselessly assured the population that the depression would end in a few weeks, that it had nothing to do with the economic system, which was basically at Round as ever, but was probably caused by unsound speculation activities on the part of other nations and unfair terms of trade. As the depression persisted, a false optimism took the place of despair, for it was now said "that the slump has continued so long and has proceeded so far that it seems hardly tenable to believe that the end is still far off. It is on this idea. . that a spirit of optimism is growing up in business circles."4 To improve upon this new optimism, reductions in the higher income tax rates were proposed in order to induce new capital investments, in the belief that additional capital expenditures would raise the national income and finally yield larger revenues at the lower tax rate. Public works were initiated to reduce unemployment, but within the frame of a balanced budget. Eventually, however, taxes were raised in the interest of "sound finance," because "the first requirement of confidence and of economic recovery is the financial stability of the United States government, and because government borrowings would denude commerce and industry of their resources, jeopardize the financial system, and actually extend unemployment and demoralize agriculture rather than relieve it. "5 The measures taken to counteract the depression, or rather the lack of such measures, intensified the crisis but did not diminish Hoover's optimism, for, as he later explained, "it is the function of Presidents to be encouraging," even when this contradicts the facts..
The highly unequal distribution of income that characterizes the capitalistic upswing and is, in fact, its precondition, becomes even more unequal in times of depression. A part of the lower incomes disappears altogether, while another part is severely curtailed; and this reduction of buying power is euphemistically described as a lack of "effective demand," causing the general over-production. Of course, since the economy does not come to a dead stop, part of production continues to yield wages and profits, and their recipients find themselves in an enviable position, which they try to maintain with all the means at their disposal. The social misery is not at once a general misery, and this divides the privileged from the unfortunates even more than before, each group fearing the other, which intensifies the conflicts between classes and within the various layers of society..
For some time, however, the population at large seemed to share Hoover's confidence in the viability of the economic system, for the complaints made were directed not so much against the system as such as against its mismanagement by an incompetent government The latter was expected to restore the customary conditions of the past, not alter the social structure. In the absence of an effectively organized counter-ideology, the capitalist ideology maintained its hold over the broad masses, which desired the end of the depression, not the end of capitalism. It was this mental climate which explains the rather curious first reactions to the deepening depression, namely, the various self-help schemes, which occupied great numbers of people, either by a return to the land, where this seemed feasible, or by all sorts of barter agreements based on diverse kinds of labor. These were of course no solutions but makeshift arrangements to weather the depression, the ending of which was presumably the work of the government, or of a new government should the existing one fail in this..
However, the depression is no respecter of ideology, and necessity immunizes against all false consciousness. Whatever the conformist notions of the dispossessed and unemployed, they had to eat; and without any savings to speak of, they had to rely on charity in order to exist. There was no unemployment insurance, no relief program for the destitute millions, only private charity and communal welfare institutions hardly able to deal with the ever present social misery and totally unfit to deal with mass unemployment. Yet there were no other. places people could turn for help. Streaming into the welfare agencies, they soon found a way to act collectively by spontaneously forming loose organizations based on the locations of these agencies..
During the first three years of the depression, no real efforts were made to adapt the relief institutions to the demands of the crisis. An ineffective public works program was soon abandoned. It was a principle on the part of the government that the crisis should be met through "the maintenance of a spirit of mutual self-help through voluntary giving. This is of infinite importance to the future of America. No governmental action, no economic doctrine, no economic plan or project can replace that God-imposed responsibility of the individual man and woman to their neighbors."6 But the number of neighbors able or willing to help decreased even more rapidly than the number of unemployed increased. The state governments had to come to the rescue of the local communities, until state funds, too, were exhausted, leaving the Federal government as the last resort..
The depression went deeper and deeper, leading to a social crisis that could be overcome only by way of a sharp policy turn and the government's conscious intrusion into the economic system. By the end of 1932 the politicians, and some economists, were increasingly prone to express fearful prophecies to the effect that if a satisfactory solution of the unemployment problem were not found soon, great convulsions and hunger riots would be unavoidable. A noticeable radicalization of the jobless as well as the employed showed itself in hunger marches, while spontaneous demonstrations and even plundering became increasingly frequent. More organizations of the unemployed came into being on their own or were formed with the aid of existing political labor organi-zations. The unrest became an object of great concern, since it expressed itself in an atmosphere of general uncertainty and social tension. In and of itself the unemployed movement was too weak to pass the bounds in which it could be held down with the usual instrumentalities, but in conjunction with the state of mind prevailing throughout society, it formed the seat of a general fermentation which, at times, was assuming an almost revolutionary character..
The gradual exhaustion of the sources of relief implied increasing misery. The minimum amount by which starvation could be warded off was at the time 22 cents daily per person, but n~ where could this amount be raised. Rents, like bills for light and cooking gas, could not be paid, and people were evicted from their homes. The extremely low standard of living caused the rate of illness to shoot upward, with dysentery and pellagra the dominating diseases. Crime was for many the only means of existence. The distress of the homeless became ever more acute. On the edge of the cities the unemployed built for themselves so-called Hoovervilles out of boxes, tin cans, and the refuse of dumps; holes in the earth used as dwelling places ceased to be a rarity. Thousands upon thousands lived in improvised tent camps. People by the millions roamed the highways, moving from the north and the east to the south and the west to get away from the housing problem and also in the false hope of finding some way to exist elsewhere. Driven out by force from hostile communities, they lived in 'jungles," in railway cars, and under bridges. Breadlines were overcrowded and people were freezing to death in the cold. Still, rebellions were only sporadic and were suppressed with the utmost brutality. The great despair created an even greater fear on the part of the authorities, which prepared the police and National Guard for civil war. The army itself was called upon to defeat the veterans of World War I, who demonstrated in Washington to demand early payment of a promised bonus, only to be dispersed with the aid of cannon, tanks, machine guns, and flame throwers under the command of MacArthur and Eisenhower..
The real responsibility for this misery, according to John Edgerton of the National Association of Manufacturers, lay with the jobless themselves, for "they do not practice the habit of thrift and conservation, but gamble away their savings in the stock market and elsewhere. Why blame our economic system, or government, or industry?"7 While this attitude is understandable, it is also meaningless, since it does not remove the problem of per-sistent mass unemployment and its possible social consequences. What is more astonishing was the refusal on the part of the impoverished to make themselves responsible for the elimination of their misery. Instead, they insisted on the "right to work" and demanded from the government the means of existence until the demand had been met. Even where they directly violated private property for instance, by taking possession of unused mines to dig coal to be sold on the market on their own account - they invoked the principle of necessity, not the conviction that capitalism had become untenable..
Whatever the numerous reasons why the American workers did not possess that degree of class consciousness which characterized the workers in the industrial European nations, "the overriding, central fact was that during the worst and longest depression in the history of any industrial nation the American working class did not show any demonstrable change in its political and economic commitments."5 And though that degree of class consciousness displayed in Europe led nowhere, it at least provided some independent response to the economic crisis, whereas in America the movements of protest addressed themselves exclusively to the as yet unchallenged social institutions. Quite apart from the question as to whether the left-wing political organizations were prepared for any anti-capitalist actions, should a chance have offered itself, they were at any rate programmatically committed to some type of social change. But in the elections of 1932, the Socialists received fewer votes than they had received thirty years before, and the Communists polled only 1 20,000 votes..
Generally hope was associated with a new government, one more willing to combat the depression than was possible under the basically deflationary policies of the Hoover administration. These policies had already been breached by force of circumstances. Some government aid was dispensed via the creation of the Reconstruction Finance Corporation in 1931, which was authorized to lend money to banks, businesses, and farms to shore up the faltering economy. Public works to help both private business and the unemployed led to large deficits, despite the desire for a balanced budget. But the decline continued and found no adequate compensatory reactions through government. As the economic system was not challenged, it was the Hoover administration which had to take the blame for the unmitigated distress. The two-party system of American politics automatically ensured that the Democratic Party should gain from the failures of the Republican administration. The 1932 elections brought the Democrats into power and Franklin D. Roosevelt into the White Rouse. In his pre-election speeches, as is customary, Roosevelt promised everything to everybody but, in however a general way, insisted on the government's responsibility to strengthen the economy and to aid its casualties. He promised a government committed to pulling the nation out of the depression, in contrast to Hoover, for whom such ideas implied the subjugation of economic laws to the arbitrary rule of government and the destruction of traditional capitalism..
Roosevelt had no such intentions. What his ambition desired was the presidency, and to get himself elected he did not hesitate to propose incompatible solutions to the social problems. He, too, was for a balanced budget and, at the same time, for government interventions in the economy on behalf of the general welfare. "Through his warm, outgoing approach and his setting forth of generalities, he had kept a heavy majority in Congress and among the public behind him. They read into his promises their own wishes. . . . In the twentieth-century tradition, he was trying very hard to be President of all the American people. . . . To the desperate Americans of 1 933, Roosevelt wished to dispense aid to all groups but, and here was where much trouble began, to require concessions and responsibilities from each in return. As Roosevelt had to make choices and move from generalities to specifics, misunderstandings developed and disappointments burgeoned. These came later. In that first summer the New Deal seemed to encompass businessmen, farmers, workers; men and women; the white-collared and the blue-collared - all in the alliance for recovery. "9.
Roosevelt's party slogan, the New Deal, implied the beginning of a fresh game but with the same players. The old cardsharps were to be turned into honest men, sacrificing their advantages so as not to ruin their partners and the game. Class collaboration and fair competition, the unattainable ideals of bourgeois society, were finally to be realized through the neutral umpireship of a benevolent government. The impossible was to be made possible by an act of will to see society prosper again as it had at times in the past. But how to begin? As always by dealing with the material nearest at hand. It was the very lack of a definite program, the playful experimentation with concrete issues, the pragmatic approach of learning by doing which overcame the downward trend of stagnation and the general apathy to which it had led..
Roosevelt's inauguration coincided with what was perhaps the lowest point of the depression. In his inaugural address Roosevelt insisted that the nation must now move "as a trained and loyal army willing to sacrifice for the good of a common discipline." To that end he would demand from Congress "the one remaining instrument to meet the crisis - a broad Executive power to wage war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe. "1 0 His first presidential actions were then aptly described as the "hundred-days war." It began with an attack on the financial chaos through the declaration of a bank holiday to stem withdrawals from the banks that were still functioning. Those banks which appeared to be solvent were reopened under guarantees of the government. The Emergency Banking Authorized the Federal Reserve System to provide its members with practically unlimited credits. The run on the banks was actually halted, and in order not to lose the newly gained confidence in the restored banking system, the Federal Deposit Insurance System was established by law, insuring small depositors against future losses..
Aware of the fact that only inflationary methods could block a further decline of the economy, Roosevelt still searched for a type of inflation that would not unduly enlarge the national debt. He tried, on the one hand, to reduce the costs of government and. on the other, to increase the money supply through the issuing of unsecured currency and through the devaluation of the dollar. Since other countries, including Great Britain, had left the gold standard in the fall of 1 93 1, devaluation of the dollar had been expected also in the United States, and the dollar, and with it gold, was leaving the country. To halt the flight of the dollar, as well as to devaluate it, Rosevelt suspended the convertibility of the dollar into gold for American citizens and temporarily stopped the export of gold. He then devaluated the dollar in terms of gold by 40 percent. America left the gold standard. The devaluation raised prices to some extent and provided the monetary means to finance the recovery program. Roosevelt liked to think of these measures not so much as inflationary but as the application of the principle of "monetary management.".
Legislation followed in quick succession to deal with the agricultural crisis, unemployment, and the economy in general. The Agricultural Adjustment Administration saw its main function in the raising of farm prices through crop reductions. The farmers' plight was caused not only by the lack of demand for their products but also by a disparity between agricultural and industrial prices due to the more advanced monopolization of industry. Numerous farmers could no longer pay their taxes, not to speak of the interests on their mortgages, and faced dispossession from their farms, which they often succeeded in preventing by direct action. There was seemingly a greater militancy in the rural than in the urban population, no doubt because in the farmers' case property was directly involved. Credit was extended to them in return for their reduction of production. Since American agriculture is almost exclusively based on single cash crops, a change to subsistence farming was not feasible; hunger stalked the countryside as well as the city slums. It is 4 curious situation, indeed, when a general abundance of foodstuffs finds its accompaniment in starvation, even among the food producers, and when no other solution offers itself but the reduction of production and the destruction of un-salable food products. It is just as curious to speak of overproduction when, in fact, food is merely withheld from people more than ready to consume it. Yet foodstuffs of all descriptions were dumped and covered with poison and quicklime to prevent the hungry from using it. Wheat and cotton were plowed under, millions of pigs and cows were destroyed in the hope of raising prices, through artificial scarcities. Farmers were rewarded for not producing commodities, although this was of benefit only to the larger agricultural enterprises, not to the small farmers..
Like anything else in the New Deal, its agricultural program was beset with many contradictions. A false romanticism on the part of Roosevelt was able to combine the reduction of agricultural production with the desire to lead at least part of the superfluous city population back to the serenity of country life. The drift from the land to the city in search for more lucrative occupations, or any kind of work, was to be reversed by a government-sponsored homestead policy as a part of the solution of the farm problem. While the number of farmers was to be increased, or at least maintained, production was to be reduced in order to raise prices to provide a living for all. But crop limitation allowed the landlords to drive their tenant farmers from the land and at the same time to pocket their share of government subsidies. "Recovery" of this type merely increased the misery of tenants and share-croppers. But, then, they were an inarticulate and powerless minority, which could easily be overlooked even among the "forgotten men.".
Like all good Americans, Roosevelt hated the English "dole," into which a limited system of unemployment insurance had "degenerated," providing direct cash relief without work. An inescapable change from relief in kind to cash relief threatened to bring the "dole" to America. This morale-destroying situation could only be prevented by the combination of relief with work, which characterized the whole unemployment program under the New Deal. The early Civil Works Administration (CWA) invented work for "work's sake" to give regular exercise and training to the workers, so that they would be in good condition when business might need them back. "The fact that enormous numbers of people were getting out of the habit of working," it was said, "together with the impossibility of getting the young ones into the habit, aroused the greatest concern among those responsible for the framing of social policy. The old stigma of idleness must be re-established, that stigma which gave this country its development, until a rising offer of work may meet with an eager acceptance at least."1 1 The young, in particular, had to be rescued from the disintegrating influence of the combination of idleness and want. To that end the Civil Conservation Corps (CCC) came into being to put the 18- to 25-year-old men into labor camps and to occupy them, in exchange for room, board, and some pocket money, with the planting of trees, the building of minor roads, tracks, and dams, and the fight against soil erosion. Although the CCC form of relief was the most expensive, it was the only one that found general appreciation, for as its director, R. Fechner, pointed out, "the 2,300,000 youths trained in CCC camps since its inception in March 1933, were about 85 percent prepared for military life and could be turned into first-class fighting men at almost an instant's notice. "1 2.
At the same time, public works were resumed under harold L. Ickes of the Public Works Administration (PWA) in order to combine the reduction of unemployment with the stimulation of capital expenditures, but with only minor results in either direction. City halls, courthouses, schools, post offices, highways, and harbors were constructed, but with so much caution that it was hardly possible to speak of an increase of public works. Rather, "they have merely been prevented from fading altogether. Public works, as such, in fact, have played only a relatively small part in the experimentation of 'deficit financing' by which it was hoped 'to prime the pump' of recovery."13.
The costs of work relief are far higher than those of direct re-lief. At the beginning of 1934 the Civil Works Administration had more than four million persons on its payroll, some of whom were not eligible for public welfare. The large expense induced Roosevelt to put an end to the CWA and to return its clients to the relief rolls, which cut government expenses by more than half and subjected the relief recipients once again to the humiliations of the "means test," that is, the proof of total destitution. A year later, however, Roosevelt found it necessary to reinstitute public employment and to launch the Works Progress Administration (WPA), which hired about three million people out of more than twenty million relief recipients. The WPA paid somewhat more than was allotted to welfare cases, but less than the prevailing wage rates, so as not to "encourage the rejection of opportunities for private employment.".
The sudden changes in welfare policy led to serious flare-ups among the unemployed and to attempts, with the aid of the left-wing political organizations, to form a nationally coordinated movement that could act as a pressure group in Congress and influence events in the interests of the unemployed. But their lobbying activities were of little avail. More disturbing in the eyes of Roosevelt and the "progressive" wing of the Democratic Party was the spreading of competitive "fascist" tendencies, as exemplified by the rise and growing power of Huey Long in Louisiana, who took some of the wind out of Roosevelt's sails by a more consistent demagoguery, which did not hesitate to promise a thorough distribution of wealth that would make "every man a king." All kinds of schemes for resolving the economic crisis were advanced, such as the so-called Townsend Plan, or Old-Age Pension Program, and Upton Sinclair's "End Poverty in California" plan, which was to give the workers some access to the means of production and distribute the wealth more evenly. These movements intensified a divisive ideological split within the Democratic Party and drove its "conservative" wing to the Republicans in opposition to the New Deal. To keep the party intact and to retain its leadership, Roosevelt tried to balance the contrary interests by means of comprmises, which either advanced or retarded the New Deal. The friction's in the Democratic Party reflected those within the nation as a whole and explain the increasingly visible partisanship as well as opposition with respect to the New Deal measures..
The Grand Design of the New Deal, namely, the National Industrial Recovery Act (NRA), was thus destined to fall apart without, and independently of the fact that the Supreme Court of the United States declared it in violition of the Constittition and therefore invalid, together with the AAA and sonic other New Deal legislation. The NRA implied business self-regulation, under the auspices of government, to end the state of fierce competition that brought prices and wages down without reaching a new stabilizing economic plateau. It indicated the loss of confldence in the self-adjustability.of the market mechanism. "The cat is out of the bag," wrote R. C. Tugwell, one of Roosevelt's early advisers, "there is no invisible hand. There never was. We must now supply a real and visible guiding hand to do the task which that mythical, nonexisting, invisible agency was supposed to perform but never did. "1 4 The economy had to be planned in order to remain a capitalist economy. It is therefore no contradiction that the "planning" consisted exactly of those measures that had hitherto been the results of unconscious market forces, that is, the increasing concentration of capital and its acceleration in times of crisis and depression. To facilitate this process, antitrust laws had to be set aside to allow trade associations to fix their own prices and profit margins through a "fair" distribution of market shares in all industries..
Harking back to the "unifying" experiences of Word War I, during which the government was to some extent able to subordinate all special interests to the "common" goal of winning the war, the "war" on the depression was supposed to yield similar results through the suspension of capital competition and the elimination of class conflicts. The self-regulation of business was therefore to be complemented by strengthening organized labor to assure more equal working conditions and to uphold "reasonable" wage levels. Parallel to setting behavioral codes for the various industries, the NRA, through special legislation, was to guarantee the workers' right to collective bargaining and the unhampered formation of independent trade unions. And this the more so because in 1932 the American labor movement showed signs of a revived militancy both despite and because of its organizational decay. Union membership, which comprised about 1 2 percent of all employed workers in 1922, had been decimated to 6 percent by 1932. From then on, however, the number of strikes to defend both wages and unions increased rapidly, which merely led to a further deterioration of the economy. The argument for the labor clause of the NRA was based on the consideration "that unions tended to keep wages up, hours down and working conditions safe - all purposes of the plan. The most cutthroat competition, worsening all three, invariably came from those industries or low-cost areas that kept unions out. The pattern in the steel industry or much of the South was that anyone who joined a union lost his job. If such industries or areas were to have the benefit of the codes, then their workers should be allowed to join unions and bargain collectively. "15.
For lack of any comprehension of the contradictions inherent in capital production, Roosevelt and the proponents of the New Deal were "underconsumptionists," that is, they mistook the results of the depression for its cause. Wages were to be propped up to increase the buying power for a larger production, and prices were to rise with higher wages, thereby increasing the entrepreneurial profits. It was all so simple; it only ignored the fact that wages are costs of production, so that the higher they are, the lower will be profits and the incentive for production increases. When prices are raised, the buying power of wages is cut down, of course, unless wages and profits rise at the same time, which presupposes capital expansion under conditions of full employment. But for the advocates of the New Deal, depression meant lowered wages and declining prices, and raising both was then the way to recovery. This was to be attained through the restraint of competition, without regard for the actual profitability of capital, on which the state of the economy, and therewith the state of competition, depends. Monopolization, being the effect of competition, was now to be reached without competition, by means of gentlemen agreements that assured everyone the required profits and the workers a living wage..
In reality things worked out quite differently, or rather they worked out in the only way they could within the confines of capitalism. Although most industries subscribed to NRA codes, or at least paid lip service to them, the codes were written up, and the authorities therewith created were dominated by big business and its special interests to the detriment of small producers, the workers, and the public at large. The control over prices and production granted to the various trade associations reduced itself finally to mere price fixing, which broke the deflationary spiral but did not enhance the economy to any noticeable extent. It did, however, accentuate the further concentration of capital and, in that sense, was one of the preconditions for the resumption of the capital-expansion process. The unlamented demise of the NRA by verdict of the Supreme Court led to some shadowboxing on the part of Roosevelt, although it merely removed the legal sanction from the 'natural" course of events, namely, the increasing monopolization of capital..
What has been said so far does not exhaust the measures taken under the New Deal. But what has been left out are its relatively minor aspects, such as the often-repeated attempted reform of the security markets in order to reduce fraudulent speculation; some restriction of banking practices to protect deposits; workmen's accident compensation laws; employment agencies to expedite the allocation of labor; and the government's entry into the power business, through the Tennessee Valley Authority, which was supposed to serve as a "yardstick" to evaluate the pricing policies of private power companies and to reclaim wasteland through the erection of dams and waterways. Long overdue innovations, such as the Social Security Act, involving unemployment and old-age insurance, and the National Labor Relations Act, became laws in the middle of 1935..
Within the context of the outspokenly reactionary character of American capitalism, all this New Deal legislation appeared to be of a progressive nature. challenging the tradition of "rugged individualism" and comforting those who saw themselves as "collectivists" merely because they opposed strict laissez faire in favor of social reforms such as had long been realized in the European capitalist nations. While the bourgeois reform movement was based on the fear of the possible consequences of the increasing polarization of society and its effect on the class struggle, the workers took advantage of the temporary division of the ruling class to attend to their own immediate needs. The growing capitalist opposition to the New Deal forced the Roosevelt administration to rely to some extent on the good will and the support of the working class, if only to save the capitalist system from the folly of its less enlightened defenders. The labor clause of the NRA, legally defining the right to organize, encouraged the extension of old organizations and the formation of new ones, but it also induced the capitalists to fight these organizations and their demands despite the NRA. The passing of the National Labor Relations Act created the impression that the government was solidly behind labor's organization drive and would compel industry to accept its results. Roosevelt became the hero and defender of the working class..
With the government seemingly on the side of labor, a strike wave ensued for higher wages and better working conditions, based on the reviving trade unions and newly formed industrial unions, represented by the CIO. The fight for union recognition embraced industries such as steel, rubber, textiles, automobiles, which had until then managed to keep unions out. Unionization took on spectacular proportions, with often a tenfold increase in membership within one year. The resistance of management gave these struggles a militant character, with -- for America - new tactics, such as the sit-down strike and even, as in San Francisco, the general strike. The government's noninterference brought Roosevelt much of the labor vote in 1936 as well as heavy financial support in the election campaign. But with the main industries organized and the unions bureaucratized, rank-and-file initiative again subsided to make room for the ordinary bargaining procedures of the labor market, thus revealing the hollowness of labor's victories, which had only served to integrate the unions more thoroughly into the capitalist system..
Working-class militancy also reflected a changing economic situation, noticeable not only in America but on a worldwide scale. The downward trend had been arrested. The forces of recovery operating within the depression, as well as the decrease in unemployment via public expenditures, increased production up to the out-put level of l 929. This was sufficient for the Roosevelt administration to drastically reduce public works, as well as the WPA, in a new effort to balance the budget in response to the demands of the business world. But the output level of 1929 had not been enough to avoid a large amount of unemployment. "We must look to a much more rapid expansion of production than has taken place between 1933 and 1935," wrote David Weintraub, "before we can expect a return either to the unemployment or the employment levels of the pre-depression period. A rough calculation indicates that, in order for unemployment to drop to the 1 929 level by 1937, goods and services produced would have to reach a point 20 percent higher than that of 1 929, even if the productivity level of 1935 remained unchanged, However, it was the restoration of profitability on the existing level of production, not full employment, which motivated the increasingly negative attitude with respect to the New Deal and led Congress to diminish its appropriations for work relief, slowly phasing out its various projects..
The recovery proved to be short-lived. At the end of 1937 the Business Index fell from 110 to 85, bringing the economy back to the state in which it had found itself in 1935. Steel production declined from 80 percent of capacity to 19 percent. Millions of workers lost their jobs once again. The New Deal was now adjudged a dismal failure, and the optimism engendered by it dissipated into general apathy. It seemed that stagnation was now the "normal" state of affairs and that nothing could be done about it. Those who still managed to live reasonably well and, of course, those who profited from the increased productivity of labor felt inclined to make the New Deal responsible for the new downturn and pleaded for giving the market a chance to run its own course..
There was of course the nuisance of the jobless, but their plight encountered increasing indifference. Society was now prepared to live with them, for, as Marry Hopkins, head of the WPA, explained, people "were bored with the poor, the unemployed and the insecure."1 7 This surplus population, it was said with some justice, "does not count in the welfare of the whole population. They are cast out of the groups within the economic system, They have no market for their only economic good, their skill and labor. At present the unemployed constitute a new class in America, and just now they enjoy legal equality with other classes. . . . But with the passing of time the line of demarcation will become more definite. People will be born into this class who never will be employed. The classes inside the economic system will bear children who will not ever be in contact with the group outside the system. The unemployed class will bccome a class of outcasts There will be no place for them no real or fictitious social service they can render. The natural thing for society is to ignore this class and abandon it. It will exist as a nonentity, no one will care what becomes of it. Its members will steal and beg and live in squalor like their brothers in India.' I8.
For all practical purposcs by 1 938 the New Deal was dead and buried. The economy revived Once more, but there were still ten million unemployed in 1 939. While total output regained the 1 929 level, private investments were still one third below the level of 1 929. Business blamed this situation on high taxes which accompanied the budget deficits and on the encroachment of government induced production on the fields of competitive private investments. Meanwhile, the pragmatically evolved New Deal found a belated theoretical justification in the emerging Keynesian economics. It was now argued that it was not so much the New Deal as its limited application and its inconsistencies that must be held responsible for its apparent failure. "The basic fact was that in 1 939," according to Herbert Stein, "the country was unwilling to commit itself to spending as the way to prosperity, especially when the commitment seemed to be permanent. To get out of the 'bottom of the well,' the government would spend as an emergency measure, but it was not prepared to regularize and perpetuate the process. "1 9.
Keynes's theories were unrelated to the New Deal; in deficit financing in order to cope with extraordinary government expenditures is as old as and older than capitalism. Since it was always practiced in times of war, it was obvious that it would also be used in the "war" against the depression. Even the idea of the "multiplier effect" Of government-induced production made its appearance long before Keynes formulated his theories. But despite the lack of a realistic theory of capital production, the bourgeoisie felt intuitively that government deficit financing may be an effective short-term expedient but could not possibly be a long-term solution. It is clear, of course, that any large-scale investment, from whatever source, will increase production, and that this increase will lead to some additional production apart from the initial investment. But behind the desire for a balanced budget lies the instinctive recognition that a continuous expansion of production by way of government deficit financing must finally destroy the capitalist system..
Of course, the bourgeoisie does not distinguish between production in general and capitalist production. Similarly economics concerns itself with mutually determining flows of abstract incomes and expenditures. If expenditures fall behind incomes, equilibrium is upset but may be restored by compensatory government expenditures. These expenditures must be larger than what is required for the ordinary needs of government, which are met by taxation. The balancing deficit is realized through borrowings on the capital market and turns into the national debt. It is assumed, however, or at least hoped, that government-induced production through deficit financing will revivify the economy and increase incomes sufficiently to yield more taxes and more savings and thus eliminate the earlier deficit. It was then a question not of balancing the budget from year to year but of balancing it over the whole of the business cycle, the deficits of the depression years being compensated by surpluses of the prosperous ones, meanwhile increasing employment and stabilizing economic activities..
It was the expectation of the "pump-priming" effect of government expenditures which induced the New Dealers to adhere to both deficit financing and the principle of the balanced budget; it was only that the balancing of the budget had to be continuously postponed, while fear of the increasing public debt set a low ceiling to the latter. With the disappointments caused by the sluggishness of the recovery, confidence in government-induced production was lost, even on the part of Roosevelt, and more attention was paid to the expansion needs of private enterprise. Although relentlessly practiced, the bourgeois mind refuses to admit that it is not the mere increase of social production but only the increase of the profitability of capital which can lead the private-enterprise system out of the depression. If there is no parallel increase of profits, government expenditures, which are by nature non-profitable, can only deepen the depression despite all the multiplier effects of an increased production. This does not mean that the "pump" of private capital production remains dry in spite of all the priming done by government. It means that only under particular and favorable conditions will the "priming" have a positive effect. In most cases it will be detrimental to private enterprise and finds its limitation in the capitalist system itself..
In any case the Keynesian theory found no verification in the New Deal. The depression was finally ended not by a new prosperity but through World War II, that is, through the colossal destruction of capital on a worldwide scale and a restructuring of the world economy that assured the profitable expansion of capital for another period. National solutions to the economic crisis had everywhere failed, but by attempting such solutions, the capitalist world system, already shaken to its foundations, had still further deterioriated. Imperialistic solutions were now the order of the day, not least because of the quasi-autarchic anti-depression measures that preceded the war. Governmental interventions in the economy are restricted to the nation but affect the world at large and find their limits both at home and abroad. At some point the government-induced expansion of profitless production comes into conflict with the narrowing profit base of capital and plunges the nation into even deeper decline. This is the point at which the imperialist solution seems to be the only way to secure the national capital at the expense of other capitalist nations. An accentuated economic nationalism precedes the international conflicts, even where it serves, at first, no more than the recovery needs of the capitalist nation-state. The New Deal, too, tried to overcome the depression in relative isolation from the decaying world economy, only to partake in its further disruption. With the Spanish Civil War the alignment of the imperialistic forces began to take shape, and the eventuality of a new global war began to agitate the world. Government-induced production became armaments production; in the United States this took the form of an enlarged naval pro gram. The actual outbreak of war turned America into the "arsenal of democracy," but it took America's entry into the war to overcome the Depression and to reach the goal of full employment. Death, the greatest of all the Keynesians, now ruled the world once more..
Notes.
1. For instance, Thorstein Veblen. The Theory of Business Enterpn'se, 1904, and Wesley C. Mitchell, Business Cycles, 1927.
2. Wilson Papers, vol.4, p.229..
3. As quoted in R. Goldston, The Great Depression, 1968, p.24..
4. The Commercial and Financial Chronicle, 1930, no.131..
5. [1. Hoover, State Papers, vol.2, p.46..
6. Address of President hoover on Unemployment Relief, October, 1931, p.3.
7. As quoted in W. F. Leuchtenburg, Franklin D. Roosevelt and the New Delt 1963, p.21..
8.0. Kolko, Main Currents in American History, 1976, p.185..
9. F. Freidel,FDR Launching the NewDeal, 1973, p.503..
10. The Public Papers and Addresses of Franklin D. Roosevelt, vol.2, p.11..
11. F. F. Calkins, "The Will to Recovery," Current History, August 1935, p.454..
12. The New York Times, January 2, 1938..
13. TheNewDeal, by the Editors of the Economist, 1937, p.28..
14. R. 0. Tugwell, The Battle of Democracy, 1935, p.213..
15.0. Martin, Madam Secretary Frances Perkins, 1976, p.264..
16. Technical Trends and NationalPolicy, 1937, p.87.
17. "The Future of Relief," The New Republic, 90:1937, p.8..
18. A. Rockelt, "The Rise of the Outcasts in America," Social Science, Fall 1936, p. 356..
19. The Fiscal Revolution in America, 1969, p.122..
1978.
About the Author.
Paul Mattick was born in Germany in 1904 and came to the United States in 1926. From 1934 to 1943 he edited the journals Living Marxism and New Essays. He has contributed numerous articles to scholarly and political journals in Europe, South America, and the United States and is the author of Marx and Keynes, Crises and Theories of Crises, The Neo-Marxists, Anti-Bolshevik Communism, and Unemployment in the United States..
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