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International Socialist Review, Winter 1961


Lynn Marcus

Depression Ahead?


From International Socialist Review, Vol.22 No.1, Winter 1961, pp.17-20, 31.
Transcribed & marked up by Einde O’Callaghan for ETOL.


Kennedy promises a New Frontier but he inherits a debt-ridden economy whose prospects are tied to the fate of a dollar which is rapidly losing value

The author is a consulting engineer who writes and lectures on Marxist economic problems

THE 1957 recession was the turning point in America’s post-war prosperity. The vast government power constructed during the Roosevelt era to save capitalism from the “Great Depression,” the war budgets, the tremendous inflationary deficits – all of these devices now appeared inadequate to prevent another great depression that seemed to loom up for the middle or late sixties. For the 1957 recession was not just another recession; it was not simply the third of three post-war recessions. There was something more: the mechanism of inflationary credit which was the mainspring of the “New Deal” threatened to become the instrument of inflationary bankruptcy. The point was reached in 1957 in which the Roosevelt cure threatened to become as deadly to the patient as the disease it was to treat. The doctors of capitalism had reached a turning point: come up with a new kind of medicine or let the patient die.

THIS situation, already recognized in varying degrees by leading bankers and economists, is propelling the ruling circles in the US to new political and economic extremes both at home and abroad. We have already seen the sudden shift, in 1959, from Dulles’ policies to the Eisenhower-Khrushchev meetings; we have seen the politically explosive “tight money” policies, the sharp and intensive anti-labor drive by the corporations and the Congress. We have seen the economic demands made upon Western Europe, the naked arrogance of US policies in Cuba and the Congo. We noted that further anti-labor legislation was postponed during 1960 solely on the grounds that this was an election year. These were only the opening wedge of what is to come.

Kennedy’s “New Frontier” and Galbraith’s Affluent Society are demands for extreme sacrifices by the US workers at home – a ten to twenty billion dollar increase in government spending, matching higher taxation, price controls, wage controls, credit controls and new labor control bills. US capitalism is in a desperate situation and is plunging toward the political and economic action the situation demands.

What was the “New Deal”?

Thirty years ago, capitalism was dying. Vast political and economic power was consolidated in the offices of the Federal Government. Roosevelt used the ominous power of the working class to regiment the capitalist class into effective combat formations. He then proceeded to hamstring the trade-union movement with regulation and regimentation under the cover of double-edged concessions. The leadership of the trade-union movement was sucked into the position of an appendage of the Democratic party and the capitalist regime in Washington. With this concentration of political and economic power in the hands of an enormous federal bureaucracy, Roosevelt used that power to subsidize the dying system.

DURING the first eight years of the “New Deal,” Roosevelt’s administration pumped about nineteen billion dollars of federal deficit spending into the depression-ridden economy. A simple inspection of banking, business activity and employment statistics for the years 1939 and 1940 is sufficient to show that this was not enough; the edge may have been taken off the depression, but prosperity was still a long way off. The second World War saved US capitalism. It permitted Roosevelt to turn an army of unemployed into armed regiments; it converted rusting idle productive capacity into production and war profits; above all, it created the emergency required to dragoon the American people and the economy into $240 billion of deficit spending, onto levels of taxation which would have been politically impossible by other means, and established a war budget which could be used to dump the surplus product into the seven seas and outer space.

The economy had recovered from previous depressions by a kind of expansion into “space.” Immigration and the opening of the West were the principal factors of US industrial growth during the second half of the nineteenth century. The US economy formally celebrated its imperialist, finance-capitalist stage of development with the Spanish-American War, and continued this expansion through the first World War and the exceptional conditions of the ten years following that war. When the bust of 1929 hit that economy, the opportunities for recovery through expansion into “space” were exhausted.

AGAINST this background, the “New Deal” economy represented an effort to expand the economy in “time” as contrasted with “space.” That is to say, the income used to buy up the surplus product and foster industrial expansion was taken from the “future,” in the form of credit.

Obviously, the source of this credit could not be the capitalists themselves. When the process of net accumulation has been interrupted by a deep and prolonged depression, the capitalists have neither the ability nor the confidence to engineer such programs. Under such conditions they must turn to the one agency in the economy which has the resources to provide and sustain the needed credit, the state. The state must “prime the pump.”

To accomplish this, Roosevelt’s regime expanded the power and operations of the Federal Reserve System and the Treasury. The heart of the procedure may be summed up as follows:

The Treasury sells bonds and bills to the banks and corporations, giving them a source of income for their idle reserve cash. In order to generate more lending power in the banking system, the Federal Reserve System buys US Treasury bonds and bills on the so-called “open market” from federal securities dealers. The Federal Reserve uses the national gold reserve entrusted to its corporate care as the basis for printing the money to buy these bonds. The Federal Reserve check is then deposited by the securities dealer with a national bank which is a member of the Federal Reserve System. That bank then uses the check to increase its reserves and its lending power in a five to six-to-one ratio. The money over and above tax revenues pumped into the Treasury is used for deficit spending to create jobs and start business in operation.

In any industrial economy the use of extensive credit procedures in such a manner is, at best, a delicate operation, requiring extensive planning, foresight and control. In a well-managed workers state such procedures can be effected without permanent danger to the economy. However, because of the laws of a capitalist economy – in the very nature of the private-property-for-profit system – the consequences of any such long-term program are deadly, cumulative, permanent, leading to collapse.

We may cite Federal Reserve Board Chairman, W. McMartin, on this point. Speaking of proposals to have the Federal Reserve System act to hold down 1959 interest rates, he said,

”When such a program was adopted during and following the war, it did succeed for a time in actually pegging interest rates on Government obligations. But, at the same time, it promoted and facilitated that dangerous bank credit and monetary expansion that developed under the harness of direct price, wage and material controls. The suppressed inflation that resulted [1947-48 – L.M.], we are now well aware, burst forth eventually in a very rapid depreciation of the dollar and even threatened to destroy our free economy.”

THE critical question since the first days of the “New Deal” has been: at what point does deficit spending lead to bankruptcy? A number of misguided calculations have been made to determine how large the federal debt could become before the critical point would be reached. A large amount of wasted effort in calculation may be saved by simply stating that the size of the federal debt, in itself, is not the decisive factor; with sufficient regimentation of the US economy that debt could “safely” expand to a very large sum. The critical point is, as the quotation from McMartin implies, the depreciation of the dollar with respect to the world market. That is of particularly critical importance for an imperialist economy struggling to expand its activity in that same world market. It is of even greater importance when one considers that the collapse of that dollar would result in the immediate collapse of that same world market. The critical point for the economy is the point at which domestic inflation presents the US finance-capitalists with an international monetary crisis.

Definite signs of precisely such a crisis occurred during and following the 1957 recession. That is what made that recession a turning-point in world history.

Evidence of the Crisis

During 1958 the Treasury incurred an increase in deficits of $18 billion. That is the price US finance-capitalism had to pay to buy its way out of that recession. This figure may be roughly compared, allowing for the effects of inflation, with a net deficit of $24 billion during World War I and $19 billion during the eight prewar years of the “New Deal.”

This tremendous ransom to buy off depression produced an immediate, threatening inflationary boom during the recession.

At the same time the US economy experienced a sharply defined balance-of-payments crisis. While the US dollar was rapidly depreciating, the wrecked economies of Western Europe had recovered to the point that their industries were expanding at the expense of US trade balances. As a symptom of that process, we have merely to observe the substantial outflow of US gold reserves toward the treasuries of the West German banks and to compare the prices of West German and American steel products at US ports of entry.

THE very procedures which were so essential to post-war capitalist prosperity, so indispensable to the reestablishment of capitalism in Western Europe, had created forces which now threatened to destroy that very prosperity. Obviously, $18 billion in 1958 was not adequate to buy full recovery from the 1957 recession: but. on the other hand, lower interest rates, greater pump-priming would have disastrously increased the peril to the US monetary position.

Expanding the consumer credit market would have required an extension of the repayment period and prime interest rates in the order of from 1% to 2%, while foreign discount rates were in the 4% to 6% range. To permit such a lowering of interest rates in late 1958 and 1959 would have resulted in a flow of funds out of the United States at a rate that might have wrecked international monetary stability. (It is for such reasons that the past three years have seen a brisk gossip in international financial circles concerning a possible devaluation of the US dollar, exactly such reasons that caused a boom in gold sales and prices on the London market, a boom provoked by capital funds from the New York market.)

The point had been reached at which it was no longer possible to maintain high profits, full employment, high rates of industrial growth and prevent a depression by “New Deal” methods. History had caught up with the “New Deal.”

Technical Decay in the Economy

Since 1955, the rate of physical output per production hour has been constantly increasing. At the same time, the absolute number of full-time employed production workers has been constantly decreasing. Since 1955, the main real source of high employment has been capitalist waste; the number of administrative and sales jobs has been increasing. In short, it has cost more administrative and sales effort to account for, supervise and distribute each man-hour of production output. During this same period, the amount of idle capacity has been constantly growing. Despite the increases in gross national product, the US economy has begun to decay. Each production worker now has to carry on his back a constantly growing cost of administration, selling and idle plant capacity; that is the main sink hole of the extra dollars lifted out of workers’ purchasing power by inflation. One of the most important symptoms of this decay is the growing proportion of unemployed; the capitalist economy is no longer able with “New Deal” methods to provide jobs for its growing population.

WE SHALL cite an example of this process of decay, automobile distribution. This example is the product of the big post-Korean War boom, an extreme but typical case of the technical decay that has taken over the US economy.

The post-Korea boom was based on two factors. First, the continuation of a high arms budget. Secondly, the exceptional but short-lived conditions created by the expansion of consumer credit. The arms budget held a floor under an otherwise shaky economy; the consumer credit splurge created a fabulous three-year boom in the consumer market. Both of these factors combined to create a headlong capital-investments boom. Industrial and commercial firms, such as automobile, mushroomed their expansion in their eagerness to grab off bigger slices of this new market. This boom lasted three years, and succeeded in achieving for US economy a fantastic rate of growth of the gross national product.

After the great boom in the auto market in 1955, the Detroit manufacturers continued to multiply the number of automobile dealers, despite a decline in new car sales in 1956 and 1957. Also despite the expansion in unit sales in 1955, the market had begun to catch up with the auto industry by squeezing away the high profit rates dealers enjoyed prior to and during the Korean War. Dealers had to double and even triple the number of cars sold to maintain the same rate of profit on annual operations. Detroit continued to hand out new franchises on every block; even gas stations were pressed into taking franchises in many areas. The point has been reached at which there are from two to three times the maximum number of automobile dealers justified to handle the current new car volume.

Despite super profit rates by Detroit manufacturers, auto dealers’ margins are at depression levels. On paper, the auto dealer is supposed to own 25% of the retail list price; in fact, he is fortunate if he grosses $200 on a new $3,000 automobile. The giant corporations thus contrive to squeeze both the worker and the small capitalist, maintaining high profits for themselves while they pass to others the cost of the inefficiency and waste they themselves create.

A similar pattern is found in all dealership industries, tires, accessories, refrigerators, etc. The only answer the big manufacturers offer to the rotten mess of waste they have created is “fair trade” price-fixing, to squeeze that much more out of the workers and to keep the retailers from fighting to trim manufacturers’ margins.

Who Runs the Government?

The Democratic party and the labor bureaucrats have been selling the myth that the people control or influence the decisions of government.

The reality is quite different. [1] The centers of federal monetary and fiscal operations are the Federal Reserve System and the US Treasury. The Federal Reserve System is a joint corporation of the Treasury Department and the National Banking System. The US Treasury is, in turn, “advised” by several private committees elected and appointed by the Life Insurance Association, the Investment Bankers Association, etc. The axis of rotation of the billion-dollars-a-day Federal Securities market in New York is the Discount Corporation, whose directors and stockholders are drawn principally from the seven leading New York money-market banks. The roster of the Discount Corporation, the Federal Reserve System, and the Advisory Committees presents us with a list of interlocking directorates representing the controlling interests of US finance-capitalism. Our national economy, federal and “private,” is clearly shown to be under the direct supervision and control of Wall Street. Other departments of the executive bureaucracy in Washington are also advised by key “private” committees drawn from the same source. This combination of the executive bureaucracy and its finance-capitalist directors and advisors represents the real federal government apparatus, which is substantially independent of the political party in power. The former Secretary of State and the present director of the CIA (the U-2 department), were members of the Dulles family from the firm of Sullivan and Cromwell. But these are only two of many examples.

Against this background we are hardly surprised to discover that many major federal economic policies are first formulated in the quasi-government, the Federal Reserve System. In fact, the Federal Reserve System with its interlocking associations in the New York money market is the real executive committee of the American ruling class and its government. In many respects, the published documents of the Federal Reserve System and other financial combines are the real political “internal bulletins” of the combat party of finance capitalism in the USA.

It would be incorrect to credit or blame only Eisenhower for the policies and executive actions pursued during his regime. These policies and actions were carried out by the enormous federal bureaucracy created by Franklin Delano Roosevelt, a federal bureaucracy liberally “advised” and directed by the leaders of finance-capitalism.

What Can They Do?

During the recent election campaign John F. Kennedy made two apparently contradictory promises. On the one hand, he promised programs that will amount to at least $10 billion a year in added federal spending. On the other hand, he promised a balanced budget. These promises are not as contradictory as they might seem.

The simple answer is a $10 billion increase in annual taxation. Who is to pay it? Kennedy promises business growth, more jobs, and considers possible tax relief to business to encourage investment. This is contradictory, unless we draw the obvious conclusion that income taxes on workers will be increased by more than $10 billion a year.

Does this present a solution to the crisis? Not in itself. It amounts to taking more money out of the presently employed workers to provide payrolls for the unemployed and higher profits for business. On the surface that might seem adequate from the capitalist’s viewpoint; it is not. The federal government cannot prevent a continual depreciation of the dollar by this juggling; Kennedy’s proposal, so far, is the most temporary kind of solution for the big capitalists, a solution which will wear itself out in probably less than two or three years. The reason for this inadequacy is simple. The federal government can dump ten billions more into the economy; it cannot, at present, control what happens as a result of that added expenditure; in a normal economy that money would tend to flow to the areas of highest turnover, most rapid circulation, greatest anticipated speculative profit, with inflationary consequences. Under present circumstances, it will tend to move out of US economy into foreign investments at an uncontrolled rate. The result is simply a worsening of the predicament the US economy faces at this present moment.

THE only and obvious “answer” to this problem is direct government control of the economy, in the form of price controls, wage controls, material controls and selective credit controls. An excellent set of precedents for the legislation and machinery required for this job exists in the experience of World War II and the Korean War. The result will follow along the lines of German economist Hjalmar Schacht’s economic reorganization of the Nazi prewar economy. That is not to suggest that Kennedy is going to introduce fascism; merely to imitate many of the economic control procedures forced upon the pre-war Nazi economy.

The finance-capitalists recognized the meaning of the 1957 recession. In late 1958 they were firmly determined to shift official labor policy from conciliation to outright war. The first test was to be the steel workers. Under the noses of the entire nation, the steel bosses and their big customers laid up inventories that would carry them through October of 1959, by which time they expected to bring the steel workers to their knees. That test failed. The steel workers did not win the strike, but they succeeded in maintaining their integrity as a union. This outright attack on labor, accompanied by the anti-labor act passed by the Democratic-controlled Congress, was the beginning of this new outright war on labor. This was not so much a matter of conspiracy by Wall Street and the Democratic party as a measure forced on Wall Street by economic desperation. The breakdown of the “New Deal” meant to them that it was no longer possible to maintain a conciliatory policy toward the trade-union movement. Bottled up by the rapid depreciation of the dollar on the world market, the capitalists could maintain their profits over the next ten years only by squeezing the difference out of the pockets of the workers.

The pattern of recent negotiations and anti-labor bills shows that the capitalists and the Democrats are not attempting the stupid objective of smashing the unions; to smash the existing unions would lead to illegal unions which would be necessarily political and probably lead to the formation of a revolutionary Labor party. Their apparent object has been to weaken the unions, to chop up their bargaining units and to hamstring them with police legislation which would make an effective strike illegal.

NIXON, Rockefeller and Kennedy all agreed on the “necessity” of legislation that will give the President added powers to settle strikes. Such anti-labor legislation in the hands of the Kennedy administration fits well with the legislation implied by Kennedy’s economic platform and John Kenneth Galbraith’s Affluent Society. Americans, Galbraith points out, are spending too much on private luxuries; more money must be diverted from private spending to public spending. That can mean nothing but smaller paychecks and higher taxes for the American worker. Kennedy’s promises of bigger public spending, easing tax burdens on business and balanced budgets adds up to the same program, a program which means regimentation of the trade-union movement by the Kennedy administration in Washington. Galbraith, in a television interview, indicates that he would be in favor of price, wage and credit controls, if they became necessary; Kennedy’s program will make them necessary.

But, even at the best, the inevitable squeeze and betrayal of the trade unions by Kennedy will not be enough to save the system. The object of Kennedy’s anti-labor program can only accomplish a certain stabilization of the domestic economy and a limited brake on the continuing depreciation of the US dollar. Only vast foreign investments can save the US capitalist system: not ten or five years from now, but next year; only the opening of a large market for foreign investments will permit the capitalist system to recover from the present recession. It is not remarkable that Washington was driven to such stupid fury by the expropriation of a billion dollars of US investments in Cuba.

While the US economy is much stronger, has far greater resources and alternatives than Hitler’s Germany, Kennedy’s economic program is as full of economic contradictions as Schacht’s. Schacht’s program put the Nazi economy through a series of financial crises that finally forced Germany to plunge into war as the only possible means for solving its internal economic problems. Schacht’s “guns for butter” and Kennedy-Galbraith’s “public works instead of wages” programs are essentially the same in principle with essentially the same inevitable consequences. On the American scene, Kennedy’s “New Frontier” will lead inevitably to either war or a social crisis; it is extremely probable that that decision will be faced within the next ten years. During the next two years Kennedy will put the US economy more and more on a war-economy footing, with corresponding political and economic forms of regimentation. Faced with repeated recession crises the administration will resort to successively more desperate and extreme measures. To the degree that the “New Frontier” postpones the depression it will, to the degree that it builds up the colonial economies, increase the peril to the dollar on the international market.

WE THINK there is no possible doubt that Kennedy will follow the general program we have outlined for him. The “New Deal” is dying; he has only one choice. The great question, the only important practical question, is how and when the working class will react to the betrayals and abuse the Kennedy regime has inevitably in store for it.


1. The student of this question is referred to the published report of hearings before the Joint Economic Committee of the Congress on August 5, 6 and 7, 1959, entitled: The Government’s Management of Its Monetary, Fiscal and Debt Operations. While study of this important subject cannot be restricted to this document, this report suffices to point up the most important matters.

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