1929: Can it happen again?

This article was
originally written on the occasion of the seventieth anniversary of the 1929 Wall Street
Crash. It was not intended purely as a commemorative or historical piece. It
was written because, to Marxists, all the signs were then apparent that another
stock price ‘correction’ was in preparation. In 1998 Long Term Capital
Management had collapsed, losing $4.6 billion in four months. LTCM was a hedge
fund. The details of their activities were arcane, but what they were engaged
in was essentially the same practice as was called ‘buying on the margin’ in
1929. In other words they were betting with other people’s money. They had been
much admired in high finance. Two of their operators, Myron Scholes and Robert
C. Merton, had won the Nobel prize in economics in 1997. Their economic
writings were mind-numbingly mathematical. However the fate of LTCM shows they
made scant addition to the sum of human happiness. But after all that had never
been their intention.

In the late 1990s the
world and his wife were setting up new technology schemes, the direct
equivalent of the Florida
land boom of the 1920s. Many of these dot.com firms never made a penny.
Commentators began speaking of a ‘new paradigm’ – exactly as in the 1920s
speculators said of the stock market boom, ‘This time it’s different. This time
it will go on for ever.’ To be fair, some veteran economists like Samuel
Brittan demurred. He had been there before. But the Marxists were largely alone
in insisting that nothing fundamental had changed. Under capitalism boom gives
way to slump.

So we were isolated
from the herd instinct of the columnists and enthusiasts who hastened to join
the new gold rush. They will not want their outpourings to be republished. We
have nothing to hide. We are proud of our analysis.

In 2000 the dot.com
boom duly collapsed. The ‘new paradigm’ was completely forgotten in the panic.
IT shares were only 6% of total share value even before the bubble burst. But
when it tanked it dragged down share prices across the board. Stock prices
continued to sink right through to 2003. It is also a moot point whether the
new economy collapse was the trigger for the recession in the real world
economy in 2001.

Republication of the
article is timely. In 2007 the sub-prime mortgage bubble finally burst. The
financial crisis has already had a knock-on effect on the banks through the
credit crunch. The capitalist world stands on the threshold of recession.
Marxist analysis of capitalism has been vindicated. Now the working class needs
to apply the programme of Marxism and abolish the capitalist system once and
for all.

On the eve of the great 1929 stock
exchange collapse, a journalist asked a speculator how so much money was being
made on the market. This was the reply:

"One investor buys General
Motors at $100"(he meant a GM share) "sells to another at $150, who
sells it to a third at $200. Everyone makes money".

This seems pure magic, but for a
while it can work. In a ‘bull market’ as in 1925-29 nearly all share prices go
up and up. Over those years US industrial shares trebled in price!

It’s happened again. In 1982 the Dow
Jones index of American share prices hit 1,000. Now shares are yoyo-ing around
at just under 11,000. For most of that period ‘investors’ could just sit back
and watch their money grow by more than 15% a year.

At the end of 1928 outgoing
President Coolidge surveyed the American economy with undisguised complacency.
"No Congress of the US ever assembled" he intoned, "on surveying
the state of the Union, has met with a more pleasing prospect than that which
appears at the present time. In the domestic field there is tranquillity and
contentment……and the highest record of years of prosperity".

Today, as in 1929, experts are
wheeled out to assure us that ‘the market is fundamentally sound’. But Marxists
believe that what goes up must come down.

To understand the apparently
mysterious movements of the stock exchange, we must go back to basics. The
foundation of the capitalist system is the pumping of surplus value (unpaid
labour) from the working class in the production process. The capitalists own
the means of production mainly in the form of shares. A share in a company is
simply a piece of paper entitling its owner to a regular dividend. A share
dividend is simply that part of the firm’s profits that is paid out to the
shareholders. That dividend in its turn can only be a part of the unpaid labour
of the working class.

Once a company has been floated on
the stock exchange, its shares pass from hand to hand. The company in question
gets no part of the share’s selling price. If I buy a second hand Ford share,
Ford no more benefits than if I buy a second hand Ford car. Of course new
shares can be issued to finance new investment. But since the Second World War
this has been an insignificant source of investment finance, specially in the
Anglo-Saxon countries. The main funds either come from funds ploughed back, or
from bank loans. In fact in some years in this country share capital has been a
negative source of company finance – firms have actually gone out spending
money to buy back their own shares.

So shares are just pieces of
coloured paper traded on the exchanges. How do speculators assess their value?
One point of holding a share is to collect the dividend. So a share price
reflects expected future profitability. But if profits are expected to rise,
then the price of the piece of paper will rise as speculators pile into shares.
So as the bubble blows itself up, speculators gain both ways – from dividends
and the rising price of their paper asset. We get the interesting situation
where shares are going up because people are buying them – and people are
buying them because the share prices are going up.

The herd instinct of the traders can
produce rushes and panics for all manner of reasons. At root though the health
of the stock exchange is a reflection of the profitability of the real economy
– even though there can be time lags and overshooting before trends in the real
economy eventually make themselves felt on the floors of the exchanges.

Once a bull market has begun, the
‘animal spirits’ (as Keynes called them) of the entrepreneurs take over.
Everyone wants to be in on the getting while the getting is good. An orgy of
swindling is the natural result. This signals that the boom is peaking, and was
regarded as a natural stage in the cycle in Kindelberger’s classic book
‘Manias, panics and crashes’. In the 1920s the Florida land boom pushed up the price of a
plot of land from $1,500 in 1914 to $1.5 million in 1926 – even though the land
in question was a patch of swamp! (That particular plot, following the
inevitable and spectacular collapse in land prices, has still to this day not
recovered its 1926 price.)

There have been speculative booms
before and since. The capitalists who take part are not stupid. Their system is
stupid. As the Chicago Tribune pointed out in 1890, "In the ruin of all
collapsed booms is to be found the work of men who bought property at prices they
knew perfectly well were fictitious, but who were willing to pay such prices
simply because they knew that some greater fool could be depended on to take
the property off their hands and leave them with a profit". Regular
readers will recall that we have already got beyond that stage in the present
cycle, as evidenced by the bailout of the crooks at Long-Term Capital
Management, the mysterious but powerful hedge fund.

Just like the 1920s, the present
period has produced in the likes of Calvin Coolidge the illusion that the good
times will go on for ever. They are talking about a ‘new paradigm’ – a whole
era of capitalist upswing in the offing. Older hands know that when that sort
of talk starts it’s time to sell. In September 1929 the Times (which was once a
perceptive paper) commented, "It is a well-known characteristic of boom
times that the idea of their old unpleasant way is rarely recognised as
such". Samuel Brittan has written a couple of articles recently attacking
the notion of a new paradigm in the Financial Times – ‘Nonsense on stilts’ and
‘Bubbles do burst’. The economic analysis unit of the HSBC, formerly the
Midland Bank, says "Virtually all the indicators checklist are flashing
red for the US" and "When such bubbles burst soft landings never seem
to be within reach". And what is the FT hinting at when in August they
publish as part of their series on business classics Charles Mackay’s
‘Extraordinary popular delusions and the madness of crowds’?

Share manipulations and the urge to
buy shoot way beyond the ability of the real economy to deliver more and more
prosperity to the upper classes. As the share boom peaks the speculators look
like a load of Hanna and Barbera lemmings who have just run over a cliff and
are only held aloft by their own obliviousness to their real situation. But the
laws of gravity will assert themselves. What goes up must come down. The crash
brings them back to earth.

A secondary failure or hiccup can
turn boom into bust when the time is right, as we shall see. Then we have
another interesting situation where speculators sell shares because they are
going down – and shares are going down because people are selling them. The
whole film of the boom is played back in reverse.

Serious analysts have tried to
explain the Wall Street crash as being caused by Massachusetts Department of
Public Utilities forbidding Boston Edison which generated its electricity from
‘watering’ its shares by splitting them 4-1.Others have derived the Crash from
the failure of the Clarence Hatry group, which made slot-machine vending
devices, in Britain in September. If such an issue is capable of producing a
devastating depression throughout the world, leading in time to the rise of
Hitler and the Second World War, then there could be no greater indictment of
the irrationality of capitalism. But of course this was a superficial glitch
that could be shrugged off if the economy was in boom. Arguments between
capitalists over the spoils are after all a permanent feature of capitalism.
Rummaging through these explanations, Galbraith muses as to the crisis of
confidence, "What first stirred these doubts we do not know, but neither
is it very important that we know." The fact is that such incidents are at
best triggers of crisis, but not its ultimate cause.

Then there is the theory that the
crash was a manifestation of panic. Well, it was. Galbraith’s book ‘The great
crash 1929’ is mainly about Wall Street, not the real economy. He describes the
mood on the exchanges on Thursday October 24th."That day 12,894,650 shares
changed hands, many of them at prices which shattered the dreams and the hopes
of those who had owned them….The panic did not last all day. It was a
phenomenon of the morning hours….the uncertainty led more and more people to
try to sell. Others, no longer able to respond to margin calls, were sold out.
By eleven-thirty the market had surrendered to blind, relentless fear. This
indeed was panic." But the panic, as we show, was rooted in the collapsing
profits of the firms whose shares were being traded relentlessly down. Mass
psychology is often used by people who can’t explain events in any other way.
But by explaining everything, they explain nothing. The events described by
Galbraith are from the first nasty hiccup, before the meltdown of Black Tuesday
October 29th. The exchanges had already been drifting down throughout
September, and there had been a couple of panic attacks the previous year.
Animal spirits and the herd instinct can explain why share prices soar above
the objective possibilities of making money out of the working class. October
1929 showed they could also crash below. But these attitudes merely amplify the
swings in an economy based on profit-making.

Another explanation offered for the
crash was the phenomenon known as margin trading. In the 1920s it was common
for speculators to buy by putting a small fraction of the face value down in
hard cash , with the rest to follow. In a rising market, what was the harm? In
three months time the share was bound to be worth more than what it was now.
This sounds very arcane, but it’s not much different from buying from the
grocer on tick. It’s credit – borrowing. To be more exact it’s gambling with
other people’s money. It’s the equivalent of borrowing from the bank to put
money on a dog. So long as the dog wins there’s no problem paying the bank
back. But if it doesn’t…

The difference with Wall Street in
1925-29 was that all the dogs were coming in. That’s how it is on the stock
exchange in a bull market. But just to make it interesting, all of a sudden all
the dogs start to lose for no obvious reason. All shares go down in what is
called a bear market. That is what happened in October 1929.

The ‘explanation’ of margin trading
doesn’t explain the sudden reversal of trend. It helps to explain why the
reversal was so catastrophic and became so general. It explains why brokers
were found washed up in the Hudson river with
a pocket of nothing but margin calls.

Margin trading was gambling with
other people’s money. What it did was drag wider layers of people into the
rout. It spread the collapse on the stock exchange to the rest of the economy
by making a lot of people a lot poorer very suddenly. But gambling with other
people’s money is a general feature of capitalist finance. It’s called leverage
in the trade. Long-term, the hedge fund that was bailed out after near collapse
last year was doing just that. That is precisely how hedge funds make their
money, and why it matters to the rest of us when they don’t.

It would be a mistake to get dragged
too deep into the ‘explanations’ offered by the wizards of high finance.
"The difficulty with all these lines of reasoning, however, is the speed
with which the collapse of production took place, and the fact that it began well
before the stock market crash. Industrial production fell from 127 in June to
122 in September, 117 in October, 106 in November, and 99 in December.
Specifically, automobile production declined from 660,000 units in March 1929
to 440,000 in August, 416,000 in September, 319,000 in October, 169,500 in
November, and 92,500 in December.

No quantity theory of money or
autonomous shift in spending, with or without a decline in the stock market,
can account for these precipitous movements. They require an old-fashioned
theory of the instability of the credit system." This quote comes from
Kindelberger’s classic ‘Manias, panics and crashes’. He is polemicising against
the conventional monetarist and Keynesian explanations of the slump. One correction
needs to be made to his last sentence. What we need is an old-fashioned theory
of the instability of the capitalist system. And that starts with its
profit-making potential. Looking at fundamentals, we see that industrial
profits were up 156% between 1924 and 1929. But industrial shares trebled in
value over the same period. By 1929 the system had exhausted its ability to
keep pushing profits up, and the stock exchange was walking on air.

Kindelberger is right to raise the
role of credit, but he doesn’t see its wider social context. What newcomer to
marxism has not sighed in irritation as they open Capital and find an
apparently pointless discussion as to how in a commodity private labour
presents itself as its opposite – social labour. But the point Marx is making
is that there is a division of labour, but in a commodity, capitalist economy
our mutual dependence goes unrecognised. In the 1920s there was a
well-established worldwide division of labour, in which the USA produced most of the world’s cars while Malaysia
specialised in the export of tin and rubber. We need tin to make solder joints
and for various other uses in car production. Any engineer can work out how
much tin we need to make a car, and how much to make 660,000 cars (US
production in March 1929). It’s even easier to work out how much rubber goes in
a tyre. But under capitalism nobody makes those calculations – that would be
the way in a planned economy. Nobody knows how much tin or rubber or how many
cars the world needs. In a global economy dominated by commodity production
individual capitalists plough their lonely furrow, concerned only with the
making of money.

But when the car factories started
laying workers off, and by December 1929 were only churning out 92,000 cars,
that was bad news for tin and rubber workers in Malaysia. The little local
difficulty in Detroit
became a global crash. That is what credit does – it generalises local problems
as well as it generalises local prosperity. It drops us all in the same thing
together, whether we know it or not. Credit is one of the ways we are all drawn
into the world economy as cogs. It is one way a global division of labour is
established behind the backs of the participants.

We have seen that the economist
Thomas Wilson was right when he noted that the market slump "reflected in
the main the change which was already apparent in the industrial
situation". But the financial collapse in turn reacted back on the
fundamentals. By 1929 one and a half million people had been drawn in to playing
the stock market. It was these little people who were most likely to be
suckered in the wake of Black Tuesday. Of course as the ordinary folk who had
lost everything pulled their belts in so tight it almost cut them in half, then
they certainly were going to have to stop running out every year and buying a
new car. Very likely they might sell their existing model to get themselves out
of a financial hole. This nice supply of cheap nearly-new cars, of course, was
further cutting into the market for new cars, and the jobs of car workers. This
further piece of bad news would be heard soon enough in Malaysia. The
lesson of 1929 was – we’re all in this together. The crisis began in the real
economy, not on Wall Street. The crash made things worse back there in
industrial USA,
and all over the world where commodities are produced and exchanged.

The slump spiralled down, in
production, trade and money. In 1932 there were 15 million jobless in the
States, out of a labour force of 45 million. By the beginning of 1933 American
national income had fallen by a third. World trade in this year was less than a
third of its 1929 level. Germany
was particularly hard hit by the Stock Exchange crash and the subsequent
depression. If industrial production in 1929 is taken as 100, by 1932 it was
only 53. That statistic, and the failure of the workers’ leaders to respond,
led straight to the rise of Hitler.

Most people keep their money in
banks. If too many lose their money, the banks go bust. Over this period about
9,000 banks closed their doors in the States. The banks tried to hang on by
ruthlessly foreclosing on mortgages, bankrupting swathes of American farmers,
especially in the south-western states. As the banks went bust, most people who
kept their money in them lost everything. And so on.

In Austria in 1931 the Kredit Anstallt
bank, laden with debt, bowed out. The ensuing wave of bankruptcies deepened the
crisis throughout Europe.

In Britain the collapse of Kredit
Anstallt brought a speculative attack on the pound. The Treasury demanded the
minority Labour government of Ramsay MacDonald show its responsibility to the
international financiers by cuts in public spending – cuts in benefit,
teachers’ wages and servicemen’s pay. Today this would be called a Structural
Adjustment Programme. The Labour government split, was ousted and replaced by a
National Government, including Labour renegades, who came to power with a brief
to put the boot in to working people. The political repercussions of the Crash,
and the slump that followed it were huge. It changed the face of the planet.

To the question – ‘will it happen
again?’ – the answer must be not whether, but when. The bad news from 1929
about bull markets is – the bigger they come, the harder they fall.

Mick Brooks
October 1st, 1999