How many times have we heard over the past few months that capitalism has been proved right, that it is the only viable economic system for humanity? But isn't it ironical that these enthusiastic advocates of capitalism should choose such a point in time to launch into their triumphalist tirades?
Talk about a viable capitalist world! The past year alone speaks for itself. For months, nearly a million soldiers dug themselves deep into the deserts of Saudi Arabia and Iraq. Eventually hell broke loose in one of the most murderous wars ever, considering its length. The cost in human lives for the Iraqi population was horrifying and was meant to be. But even more horrifying for the whole region is the social and economic cost of the war. It will take decades before the damages can be repaired. Putting a figure on this social cost would be meaningless. But there is no doubt that it is way beyond the estimated £15bn to £30bn cost of the war to the West. And all this for what?
How can this economic system be considered viable, let alone healthy, when, over the past century, it has generated an unending succession of wars, such as the Gulf War, all of which with one single purpose - to strengthen the hand and increase the wealth of the already richest powers? Even leaving aside the human casualties, the gigantic amount of wealth and resources destroyed during these wars would probably be more than enough to turn the whole of the Third World into a land of plenty.
Beyond its convulsive spells of war and destruction capitalism is also a crisis-bound system. It is not just prone to crises, it feeds on crises. Crisis is its very condition for existence, its permanent state.
In Britain for instance, in the past 40 years there have been nine recessions. Every recession was meant to be the last one, until it was followed by another. In between were periods of so-called recovery, sometimes even described as "economic booms" or as "prosperous". Whose prosperity it was, however, is not hard to guess.
For most workers, particularly over the past twenty years or so, prosperity and recession have made less and less difference. Prosperity never raised wages, it only increased working hours, with a lot more overtime being worked. Unemployment did go down at times, but never below an unacceptable level of 2 millions in real terms in the 80s. And while recessions were used to impose sacrifices on workers under the pretext of speeding up an impending recovery, recoveries were used to impose more of the same under the pretext of avoiding a new recession!
Over the years, in the richest countries of the world, workers have had to get used to the idea that a "normal", and even a "booming" economy, involves a high level of unemployment and poverty as well as low wages. Meanwhile, in the Third World, a depression has settled permanently, involving deprivation, over-exploitation and often starvation.
This, we are told by the enthusiastic well-to-do supporters of capitalism, is as much as society can afford. And they would expect us to swallow at the same time their claim that capitalism is the best thing that can happen to humanity!
Whether the pro-capitalist whizzkids, the legion of John Major and John Smith lookalikes, like it or not, the world capitalist system shows every symptom of terminal illness.
This is no longer a matter of assessment, nor one of reasoning, it is a matter of facts, the hard facts experienced for generations by the billions of workers and poor people who have been, and are even more today, at the receiving end of the capitalist system throughout the world.
Yet another slide towards recession
The hard facts are that, today, all economic indicators are flashing again throughout the world. Industrial production is receding everywhere, including in the so-called Eastern Asia "miracle" countries. International trade is slowing down.
Most of the world's major companies have already announced new plans to slim down their workforces and reduce the scale of their operations. Car giants such as General Motors, Ford, Hyundai, Toyota; electronic multinationals like IBM, Siemens, Sony, Hitachi; steel giants in Spain, France and the USA; even the major banks like Barclays - every section of the world economy, every country, is affected.
Not that these major companies are actually feeling the crunch for the time being. Why should they? Most of these companies have used the past decade to put their workers and operations into shape - hence the turning of the screw on working conditions, the speedups, the use of outside contractors, the closing down of older plants, etc.. By now the major companies are by and large in a position where they can face a reduced market without losing profits. Today these companies are not actually reacting to a deteriorating market but rather preparing for what may be coming next. And given the scale of the current job cuts, the capitalist industrialists are obviously not very optimistic. In any case they are taking no risk whatsoever. They are acting as if they were expecting the market to narrow down very sharply in the coming years.
By anticipating what they fear could be a deep depression, however, the major companies are also increasing the likelihood of such a depression. Every politician in the world, every government, is aware of this fact. But being in power to promote and further the interests of the big companies, all they do is cross their fingers and hope for the best, while helping the companies in their austerity drive.
Hence the farcical climax reached in Britain in the bouncing of figures and forecasts between politicians. Thus, in March last year, the business weekly The Economist announced that «there will be growth in the spring », soon followed by Lamont who told businessmen in April that «the economy will recover in the second half of the year ». By the third week in June, Lamont was predicting that as «consumer spending led us into the recession » so it would lead the economy out again. By August his spokesman from the Treasury could report «the slump in sales is over or, at worst, coming to an end ». In October, Lamont was out again announcing that «green shoots of economic spring » were appearing and, a couple of weeks later, the «manufacturing recession is over ». By January 1992, Major rushed to back Lamont's efforts in crossing his fingers, reporting that the «economy is recovering... it has already started as we speak ».
Who can still refrain from laughing at Lamont's crystal ball predictions about the coming recovery, you know the one which is always "round the corner" but always fails to materialise..? No wonder this has become something of a practical joke. And all this wishful thinking to tell us eventually, last week, that, in 1991, Britain's overall economic activity had experienced its worst drop since 1931, in other words since the highest point of the Great Depression...
But it was not just the politicians blundering around for electoral reasons. All along this period, the top brass of the capitalist machine, including the heads of the Bank of England and the so-called leading economic experts of the City, shared Lamont's hopes of an impending recovery, although most were usually less confident about the likelihood of short-term benefits for the population as a whole. It is rather striking to see to what extent even these people can prove totally blind when it comes to foreseeing even short term economic developments, despite the armies of forecasters and analysts who are working for them! A clear reflection, not of any particular incompetence on their part, but of how unpredictable the capitalist economy is, even for its most faithful advocates.
In any case, there can be no question by now. We are stuck up to the neck in recession. Whether there will be a recovery, when and how, is impossible to say. What will this recession entail, how it will compare with the Great Depression of the 30s or to any other past recessions, no-one can be sure.
But we can be sure that the same economic and social forces that have brought about the present recession, as well as the previous ones, will still be at work in the coming months and years, simply because they are part of the very foundations of the capitalist system. These are the forces which are working against us, against our livelihood, against our class. And if we are to fight these forces, and to be successful, we need to know them and how they have operated over the past decades.
The poor man's "boom"
The Great Depression started with a stock market crash, in October 1929. It reached a cataclysmic conclusion with the rise of fascism in Germany, the Second World War and the resulting unmeasurable destruction and mass slaughter.
In the post-war years, the capitalist class responded to the widespread aspiration for change among the population with the claim that capitalism had learned, that the pre-war economic chaos would never be repeated.
The subsequent period, what is now described by economists as the "postwar boom", which came to an end in the early 70s, is still quoted today as a kind of "golden age", as the proof of the ability of capitalism to sustain stability, prosperity and expansion, over a long period.
True, between 1952 and 1968 world output doubled. And it was unquestionably the longest period of continuous world growth in the history of capitalism. These are the facts on which is based the whole mythology surrounding this so-called "postwar boom".
However, the rust was not far beneath the gloss of this "golden age". Thus, for instance, the actual yearly growth in output was 3.8% on average during this period - which is only about three times as much as during the 1913-1950 period. Hardly an impressive performance bearing in mind that the latter period included twelve years of world wars and five of deep depression...
Nor was this relative growth the result of "free market forces" as the mythology would have us believe. This legend is a complete farce. For much of this period in fact, in every industrialised country, government policies followed the same pattern as during the war itself. Massive investments were made by the different states on behalf of the capitalists and for their benefit, either directly through nationalisations like in most European countries, or indirectly through massive state orders and subsidies to private industry, like in the USA. Besides, wartime custom barriers, such as Britain's import quota system, were maintained to protect the profits of local capitalists against foreign competitors. While "free market forces" had nothing to do whatsoever with this growth, state intervention did provide for most of the needs of the capitalists.
What happened on a world scale had even less to do with a free market. A tide of dollars flooded the world, providing capital for investments wherever it was needed. Were such a tide to take place today it would probably trigger a complete collapse of the world monetary system, and of the whole economy as a result. Not so in the postwar period though. The American government was able to print dollar notes at will without anyone ever questioning their value, that is until... it actually ended up in near disaster.
An artificial economic order
Starting in 1944, the whole world monetary system was run as a dollar monopoly. Using their wartime position of strength the American capitalists had dictated their own terms to the rest of the world, in the shape of the Bretton Woods agreement. This agreement made the dollar as reliable a security as gold itself. The rate of exchange of any other currency against the dollar could only be changed through a complex international procedure which was tightly controlled by the USA. Rather than allowing market forces to operate freely, this agreement effectively protected the world monetary system, and particularly the dollar, against these forces.
The Bretton Woods system was entirely based on the universal belief in the strength and dominance of the American economy. In that sense it was both irrational and artificial. While reflecting, to an extent, the economic balance of forces back in 1944, it did not take long before it ceased to have any relation to reality.
Because this system protected the US economy from the pressures of the world market, it unleashed forces which, by seeking to take advantage of the Bretton Woods agreement started digging its grave. Thus, on the self-proclaimed strength of the US dollar, American capitalists stopped investing in production and went into foreign finances where they could make quicker and bigger profits. The US trade deficit started growing thereby boosting further the outflow of US capital towards Europe. The US government, whose needs were growing fast due to rocketting military expenditures, had to turn to European capital for borrowing. It had to print yet more US dollars which soon made up the bulk of many a European capitalist's investment portfolio.
The US economy was overspending enormously. Its industrial superiority was undermined by lack of investment. The resulting imbalance became obvious as early as the mid-60s. Yet it took over five years before the artificial setup of the Bretton Woods agreement stopped protecting the US economy and, in fact, the world economy as a whole, from the consequences of its own chaotic and irrational operation. It eventually collapsed in 1971 when, all of a sudden, a wave of panic flooded Europe and capitalists rushed to exchange their dollars against anything they could lay their hands on. The irrational belief in the dollar on which the world's relative economic stability had been based for the past 27 years, was suddenly over. But it was not over as a result of a rational process, it was over as a result of a snowball effect which had nothing rational about it. The profits pendulum had eventually swung back the other way.
Rather than being a triumph for market forces, these 17 years of relative economic stability were in fact forced on them thanks to the particular circumstances left by World War II. But in the end, having operated in the background for so many years, the market forces came back to the forefront of the economic scene with a vengeance.
There is no doubt that had the market forces worshipped by our present day free-marketeers, been allowed to operate freely on a world scale after 1944, there would have been no "boom" whatsoever. And probably the capitalist system would have been simply unable to recover from the war and the world depression that caused it.
Having said that, it is also worth pointing out what this so-called "golden age" was really like. While fortunes were built in that period by the likes of Robert Maxwell, the world experienced a continuous succession of wars - from Greece to Malaysia, from Korea to Indochina and Vietnam, from the Middle East and Aden to Algeria. Meanwhile the Third World went through its worst period of impoverishment, although there was still much worse to come.
A three-fold increase in manufacturing worlwide between 1953 and 1973, they say? Maybe, but how much of this was new investment? In the main it was just replacing worn out or destroyed plants. New jobs were created only as fast as old ones disappeared. And where new jobs did appear, as in Germany and France, they were mainly filled by agricultural workers who were being displaced from the land.
In the rich countries, unemployment went down to almost nothing, they say? Theoretically it was true, but not in reality. Instead, the actual numbers of people who needed a job but could not find one, went up considerably. Most working-class women could no longer afford to stay at home, but many could not find a job while not being registered as unemployed.
Likewise, immigrant workers were drafted in to fill low-paid jobs in Europe and the USA. In those alleged golden years, unemployment became international. Many unemployed workers in Jamaica or Pakistan were farmers who had been ruined and thrown off the land by the introduction of industrial crops for the benefit of rich capitalist shareholders who lived in Chelsea or Richmond. At home most had not the slightest chance to get a job, they were more likely to get one in the East End of London or in Liverpool. While dole queues seemed short in Britain, they spread as far away as Kingston, Karachi and Dacca where, if anything, they were longer than ever before.
1971 - back to chaos
The formal end of the Bretton Woods agreement came in two stages, between December 1971 and March 1973. The world monetary system ran amok. World inflation which had been hidden before, broke into the open. This was shown graphically by the growth of money supplied by governments: the annual growth rate which had been 7% on average over the previous eight years, went up to 14% in 1971 and 20% in 1973.
The end of the irrationality of the Bretton Woods system, however, did not result in more rationality. The capitalists only went for new ways of making profits. From living as parasites of an artificially stable monetary system, they adapted to living as parasites of the new monetary turmoil.
Since the monetary crisis was disrupting markets, leading to a slump in manufacturing profits, the capitalists kept away from investing in production. And with all major currencies floating against one another, monetary speculation became rife.
Before, adjustments in currency exchange values had been slow. Now, with changes taking place by the day, if not by the hour, it was possible to make quick profits on price variations, provided one could play with big enough sums of money. The Eurodollar market, which was based on dollars owned in Europe, far from the tight regulations of the US financial market, provided an ideal playground for such speculation and one which was beyond the reach of any government, thereby adding to the monetary turmoil and making it even more uncontrollable. With money looking so unstable, gold regained favour among investors and became a major target for speculators too.
The final shock in this chaotic period came in October 1973, with the oil crisis and a four-fold increase in crude oil prices.
The official story was that it had nothing to do with capitalism and everything to do with the greed of the Arab oil-producing countries. How come were the major oil companies, the "Majors" as they were called, the main beneficiaries of this increase then? This was not a coincidence, of course. Since the late 60's, the "Majors" had been investing heavily in other energy sources, buying coal mines in the USA for a nominal price in particular. Their strategy had been very clear: they were expecting the world economy to slow down at some point and they were getting ready to maintain their profits on the basis of a reduced market. To that end they needed a big increase in oil prices, so that they could increase their profit margins. By the same token they were expecting higher oil prices to turn the so far uncompetitive US coal mines into highly profitable operations.
Thus the Arab countries' decision fitted perfectly the plans of the "Majors" and its timing was perfect for them. Besides, given the close relationship established over decades between the Arab rulers and the oil companies, it is not conceivable that the decision to increase crude oil prices could have been taken without the consent of the Western oil magnates.
And once again, the drive for profits, by the oil companies this time, resulted in worldwide chaos. The slowdown in manufacturing had already caused worldwide unemployment to rise by a third between 1969 and 1971. But, in the summer 1974, for the first time since World War II, industrial production declined - by 10% over the following ten months with trade amongst the rich countries declining by 13%, leading to a similar decline in private investment. By 1975, 11% of all industrial plant and machinery was out of use, unemployment world-wide had doubled to 15m.
Squeezing the Third World
While the rise in crude oil prices, soon followed by many raw materials, pushed the world industry deeper into recession, it opened up new prospects for capitalists. All of a sudden many Third World rulers could rely on much greater regular incomes, which made them attractive potential preys for Western capitalists - as borrowers for Western bankers, as customers for Western industrial companies.
After 1974, massive amounts of money were loaned by private banks to Third World governments, for a hefty interest of course. This flood of money to the Third World quickly returned into Western pockets, however. It was largely squandered on Western-made military hardware and luxury goods. Hardly any of that money ever benefited the countries' population. But it did benefit Third World capitalists, if only sometimes just the local ruling family, like the Al Sabah's in Kuwait. With foreign capital flowing in, rich Third World nationals could easily invest for their own benefit in safe havens, namely in the rich countries. Thus, between 1979 and 1983, £45bn from Mexico alone was sent overseas.
For a few years, until the end of the decade, it seemed as if Third World loans would be an everlasting bonanza for Western capitalists. Repayments were made and they were paid more or less on time, and business flowed in. The fact that new loans were largely used to pay old debts did not bother the bankers as long as the money rolled in. After all, lending to a Third World country was particularly profitable as the borrower was expected to pay a higher than average interest rate, up to over 20% by 1981.
But ignoring the problem of accumulated debts was not a way of solving it. Already, by mid-1981, the first danger signal flashed when Mexico, although an oil-producing country, was forced to reduce its imports for lack of cash. The International Monetary Fund (IMF) sensed the threat and almost immediately responded by increasing lending quotas for Latin American countries. But it was already too late. By that time crisis had settled in these countries. It came to a head in August 1982, when the Mexican government decided to delay its payments of foreign debt interests by three months, soon followed by Brazil. Again, the IMF intervened. But the heat was so great this time, that under instruction from the US government, part of Mexico's interest payments were covered by the IMF.
And indeed the stakes were enormous. It was not just Mexico and Latin America having temporary problems, it was the whole Third World which was threatening to go bust. Not that capitalists worried in the least about the consequences of bankruptcy for these countries' populations. But the total debt involved was over £200bn. Bankruptcy did not only mean losing this capital. It also meant losing the regular interests paid on it, which represented a significant part of the profits made by Western banks, particularly American and British ones. In other words, what was threatening was a world banking crisis. The IMF was not so much in the business of bailing out Mexico and the Third World, but rather of bailing out the Western banking system itself.
Gradually, with the financial backing of the rich countries' governments, international institutions refunded private banks for part of their Third World "bad debts", thereby taking over from the private banks as creditors of the Third World. Thus, the banking system got off the hook, not without some casualties though. Bank of America, for instance, the biggest American bank, was eventually forced to wind up its international operations and ended up as a somewhat secondary regional bank a few years later. In any case, market forces had certainly nothing to do with this last minute rescue operation of the banking system. Once again it was state intervention which did the trick, precisely by restricting the impact of market forces.
As to the Third World debtors, this bailing out was not meant to ease off the burden of their debts. They were left in total and utter shambles. In addition, instead of having to face individual banks when it came to discussing their financial difficulties, they had now to face the IMF, which was not very different from dealing with the UN Security Council itself. And the Gulf War showed what that means.
The credit bubble
Following the Third World debt crisis, the profits pendulum was bound to leave the Third World with the mess it had created, and to swing back again to the rich countries.
The bailing out of the Western banks' "bad debts" problem freed enormous amounts of capital which flowed back into the rich countries, looking for new profits. But given the general low in manufacturing and trade, capital did not flow back into industry and production. Speculation on gold, precious metals and works of art, were its first targets. But that was only petty cash compared to the enormous sums available. And since, floating currencies caused permanent uncertainty, interest rates remained high. Lending in the West seemed to offer a more profitable arena with much larger scope for expansion.
Banks proceeded to advertise their willingness to lend to anybody for any purpose, short-term, long-term, you name it. The only proviso was that borrowers had to be prepared to pay the high interest that came with the loans. This was the period when plastic credit cards really took off. And it was not just the banks lending money. More and more big industrial companies used their spare cash, and if necessary borrowed some more, not for new investments but for lending. After all, interest rates were higher, and considered safer, than returns on productive investments. Britain's GEC, a heavy engineering giant, under the chairmanship of Lord Weinstock, became particularly famous as a major lender with a cash stockpile of around three-quarters of a billion pounds.
This credit frenzy, which was particularly popular with the middle class of the rich countries, resulted in the so-called "mini-boom" of the mid-eighties, first in the USA and then in Europe. Consumption increased due to credit, thereby boosting trade and production. Except that all this activity was based on Mickey-Mouse money. Money borrowed by consumer was used to pay for products which had been manufactured by industrial companies which had borrowed money in order to pay for machines, raw materials and even wages. Eventually most of the benefit from this artificial activity ended up in the hands of the financial system in the form of interest rates which were used to finance more lendings. It did not suppress the slump in production or the lack of productive investments, it only postponed the problem by deferring the settlement to a later point in time.
The enormous amounts of cash available through credit also opened up new avenues for making huge profits. This was the beginning of the takeover fever. It became possible to borrow the cash necessary to buy a majority stake in big companies. All one had to do was to offer shareholders a much higher price for their shares than what was on offer on the stock market. These were costly operations, which could require borrowing up to several billion pounds. The company which was taken over usually ended up being stripped of its real estate assets, then partly closed down, and what was left of it was sold again. Thousands of jobs went down the drain each time, thereby undermining further the production sector. But the profits were huge enough to make it worthwhile for the capitalists involved, even after interest and handling costs had been paid. And after all, what did they care about the jobs of a few thousand workers being lost or the disrupting effect for the economy?
But growing scope for credit called for more cash to be made available. The system had to find a way of channelling more private capital into the financial market. It resorted to an old device, the stock market.
The problem initially was that stock markets had not been used extensively since their collapse in 1929. After that, strict regulations had been introduced to avoid another crash. In many ways, stock markets had become things of the past, which were mainly used by institutions and long-term investors. So that, ever since the war, stock markets had played a limited role. In particular they were hardly used by companies as a means of raising fresh capital. In Britain for example, in 1978, 65% of companies' investments came from undistributed profits, 15% from bank loans and only 4% from share issues. As a result dividends on shares were small, when they were paid at all.
The problem was therefore to revive the stock markets, to make them attractive to anyone with a few hundred thousand pounds or more in the bank, and to give to financial companies all freedom to tap the money chanelled through these markets.
"Big Bang" on the stock markets - not just a mere stunt
The first thing that needed to be done, of course, was to make shares attractive. Companies provided for that. The turn of the screw on the working class in the early 80s had boosted profits and more profits could always be made available to shareholders by cutting on the already minimal investments, by reducing cash reserves, by selling and leasing back existing assets, and by using a variety of accounting techniques. The point was to put some optimism into companies' balance-sheets and to pay sizeable dividends.
Governments intervened once again to cater for the needs of capital. Certainly, the privatisations and flotations of public companies which were carried out in Britain and France for instance represented a sizeable giveaway to the capitalist class. But they were also part of the drive to make stock markets more lively and attractive. Everywhere stock market regulations were relaxed, as well as regulations over international transactions. Tax incentives and various rebates were introduced for gains made on stocks. The deregulation of the market was so extensive that technically, it became possible to turn anything into bonds that could be bought and sold in the City or in Wall Street.
The blossoming of scores of different breeds of mortgages indexed on foreign currencies, on tax-haven-based investment funds, even on the pop-corn market if anyone wanted that, was one example of this deregulation.
There were many others. Like the development of the options and futures markets which allowed one to play big game on the stock market without having more than one tenth of the capital required - of course profits were very fat at that game, but losses almost always a catastrophe. You could buy so-called "junk" bonds, that is pieces of paper each of which represented a share in some future venture which had yet to come to existence, let alone be profitable.
You could even buy debts bonds - for instance a bond representing £1000 borrowed by a building company could be sold at a reduced price, say for only £100, if the company went into the red, but you still got the interest payments eventhough you were unlikely to get back the money of the loan itself. Likewise there were real estate bonds, which were junk bonds on real estate developments which had yet to be developed and sold, a variety which was particularly fashionable in the second part of the 80s, during the worldwide property boom.
All these scraps of paper, most of which represented in reality not even assets but only potential profits, could be bought and sold like any other good old company share. In short, companies which were looking for cash were given one million and one possible ways to raise it through the stock market.
As a result of deregulation and of the revamping of dividends, the stock markets eventually started to take off by mid-1983. But this was still not good enough for the capitalists. If huge profits were to be made on these markets, if it were to become possible to buy and sell millions of shares, bonds, etc.. at will, the daily volume of transactions had to be increased too. This was the purpose of changes introduced first in the USA and Japan from 1984 and then, a lot more glamourously in London, on 27 October 1986 - the day of the "Big Bang".
The "Big Bang" involved two things: on the one hand it allowed any company to operate directly on stock markets without having to go through an intermediary; on the other hand, it introduced a computer-based trading system which made it possible to carry out transactions worth millions of pounds and involving partners in any of the major financial centres in the world, in a matter of seconds. The stock markets switched from paper money to electronic money, the most volatile and abstract form of money ever invented by man, and the most divorced from reality too.
The stock markets became a field where anyone who was rich enough could put his money into any shape or form, with a reasonable hope of getting a high return quick and where anyone looking for money to borrow could find it, provided of course, he belonged to the financial nomenklatura.
Even before "Big Bang", share prices on the stock markets had already reached record levels. "Big Bang" and its foreign equivalents triggered a frantic activity on the markets, with a five-fold increase in turnover up to 500 millions shares traded every day and share prices going even higher.
The October 1987 crash: a reminder of 1929
Along with the huge profits made on the stock markets, soon came the first casualties of the new system. The US "thrifts" or savings banks, which had been allowed to invest up to 40% of their deposit on the financial market, made big losses and, by 1985, the US government was having to bail them out by the hundred, at a total estimated cost of £250bn.
By the autumn of 1987, one year on from the "Big Bang" and with the markets at record levels, there was talk of parallels with 1929. And indeed there were similarities. Just like in the run up to the 1929 stock crash the gap between share prices and the performances of the companies these shares were meant to represent, was growing wider and wider. Just like in 1929, companies were using their cash to play on the stock markets rather than to finance new investments. And just like in 1929, the only visible source of growth for the economy was a consumer boom which was largely artificial, being financed by credit and by the super-profits made by some on the financial market. The question was, and it was discussed openly in several financial publications, including in the columns of the Wall Street Journal, whether a re-run of the 1929 crash was possible.
The answer was usually negative, on the grounds that the financial system had become much safer, that investors had become much wiser and that the hickups which might happen occasionally here and there, would be immediately corrected thanks to the computer inter-connections between the major stock exchanges. In any case there was nothing to worry about.
Monday 19 October 1987 provided a different answer. The crash, and it was unquestionably a crash, was, if anything, more spectacular than its 1929 antecedent. It started in Japan and then spread immediately to London and New York, and even led to Hong-Kong's stock exchange being closed for four days, thanks, among other factors, to computer-interconnection.
In just one day, 2.1bn shares changed hands in these three centres, the bulk being sold via phone-linked computers. By comparison, on the day of the 1929 crash in Wall Street, a mere 13m shares had been traded over the day. in London, share prices went down by 25% in three days, and by 23% in Wall Street. The overall value of shares was reduced overnight by more than £500bn.
And then, it was over, in a matter of just a few days. Unlike in 1929, when investors had rushed to withdraw their money, providing the snowball effect of the crash, there was no panic this time. The biggest individual loser, an American who lost £308m, was able to say «It's only paper ». In fact individual losses were still relatively small compared to the huge gains made since 1983 when share prices had started to rise.
Also, unlike in 1929, few bankruptcies resulted from the crash, at least not immediately, and in any case not on any similar scale. This was largely thanks to the formal instructions issued by governments to the banks to the effect that they should extend credit facilities to companies as required, without asking questions, at least for the time being.
The actual event that caused the 1987 Crash remain difficult to assess, just like in the case of the 1929 crash, even today. One can only point, as we did before, to the economic background as creating the possibility for a crash to happen.
But there is also space for hypotheses. One among these seems to fit both logic and facts: that what initiated the downward trend of prices, which in turn triggered the crash itself, was a concerted attempt by some of world's big institutions to deflate a market which had become dangerously inflated in their view. No doubt these institutions would not have chosen to cause a full-blown crash, but to what extent was it predictable as a result of their moves? In any case, such a scenario would certainly fit with the repeated warnings issued, prior to the crash, by some of the major insurance companies both sides of the Atlantic for instance. And, given what we saw about the policy of the oil companies in the 1973 oil crisis and its consequences, it is certainly not beyond financial corporate strategists to work out such a scheme and to take such enormous risks on behalf of the whole system.
So, the 1987 crash only provided a mixed answer to our initial question as to whether a collapse of the 1929 type could happen again. On the one hand it proved that such a collapse was indeed possible and that an artificially inflated stock market bubble could end up bursting in no time. On the other hand it also proved that the capitalist system had built defences which, although they were far too weak to prevent such a bubble developing beyond acceptable levels, were strong enough to prevent catastrophic consequences when it did burst.
But the crash did confirm that, were this defence mechanism to prove unable to prevent a catastrophe, the collapse of the economy would spread instantly throughout the world, resulting overnight into a crisis on a scale which was never reached even during the worst years of the Great Depression. And it did confirm as well that wherever market forces were in operation, which was certainly the case on the stock markets, the drive for profits can indeed endanger the whole of world society.
Towards another crash?
The stock market bubble was only temporarily deflated by the 1987 crash. Within a couple of years share prices regained their pre-87 levels although share-trading levels remained at a much lower level, just over half of what they were in the run up to the crash.
But the crash did cause institutions to reduce their involvement on the stock market (except in well-established shares like the British ICI or Marks & Spencer). Instead they kept large amounts of cash or converted it into short-term loans. Likewise many companies and institutions, including banks, cut down on their world-wide commitments retreating mainly onto the national territory.
Before the Crash took place there had been a large boom in property prices fuelled by very high company profits. As profits kept rolling in, many institutions, particularly banks, invested in buying up real estate bonds, which they considered "safe" investments carrying in addition a very high yield. In the USA alone, over £400bn worth of these bonds were being circulated. But in doing so, the banks gambled on the continuation of what seemed then to be a period of relative prosperity and on the resulting willingness of companies to invest in new premises.
The 1987 crash, however, turned the "safe" investments into "bad debts". It wiped away part of the financial gains made previously by many companies and shed doubts on the overall health of the economy. As a result most companies cut down their expenditure programmes. Eventually, by 1988, the property market began to slide, first in the USA, later on in Europe and Japan, as huge developments, like the prestigious Canary Wharf in East London, remained empty.
As a result many real estate bonds became worthless as property developers went bust, and in 1988, 220 American banks had to close, their debts being paid by the American government bank. And this "bad debts" problem with loans at home, has now spread to all Western countries, weighing heavily on the banking system, as was shown recently by the major British banks having to set aside massive provisions for "bad debts", most of which are related to real estate.
The world's stock markets have continued to fluctuate. Up in 1988 and 1989 but down again in 1990. They took off again in 1991 with a 30% increase in Wall Street and 15% in London. Just now share prices have reached they highest level ever and takeover are booming again.
But prospects are bleaker in the rest of the economy. Profit margins have become thinner. Companies are crippled with debts and interest payments and forced to cut down on dividends. Thus Lonrho, the minerals conglomerate with extensive interests in Africa, was forced to reduce its dividend for the first time in 20 years. The reason? Lonrho's market value of £900m is outstripped by the size of its debts amounting to £1.1bn. In order to service such a massive debt, the directors had no option but to reduce dividends.
Companies' indebtedness has now reached such a level that, for instance, the total debt of all British companies exceeds the sum total of all transactions taking place in Britain and between Britain and the rest of the world over a year. This does not necessarily mean that companies are poor, in most cases they are not and have large amounts of cash which they use to play on the financial market. But it does mean both a danger of crisis for the banking system and, if it did happen, immediate drastic consequences for the whole economy which would be instantly starved of credit.
And the risk of a banking crisis is also still looming for other reasons. In the USA, the problem of bad real estate debts has grown worse. Around a quarter of all loans on property are no longer paying any interest. In 1991 another 124 banks ceased trading and the Federal Reserve expects double the number this year. Indeed the situation is so dire that the US government may force foreign banks to set up independent American subsidiaries to provide them with the same protection as American banks.
The same conditions which prevailed just before the 1987 crash are still there, except that they are now much worse, whether in terms of the artificial activity of the stock markets, the credit bubble and the indebtedness of companies and the growing difficulties of the banking system. All the ingredients are there for a new crash to take place. The only question is whether it will start on the stock markets as in 1987, or somewhere else; whether it will spread or not to the rest of the economy; and when it will happen if it does. This is one of the so-called "wonders" of market forces: you can always tell when they have ceased to cope with the situation, but you never know how and when it will show.
Western workers are rediscovering Third World conditions...
Despite the reiterated proclamations about the «end of the class struggle », there is no doubt that class divisions have become sharper over the past twenty years in the rich countries.
British statistics certainly show how well the very wealthy have done during the last decade or so. For instance over the ten years to May 1989, the richest 1% saw their income rise 346% as a result of tax cuts, interest rate rises and salary rises. Their tax reduction over the same period has been £26.2bn. Today Britain has nearly 400 multi-millionaires, all of whom have a personal fortune of more than £20m, 8 of whom have more than £1bn.
While the top 1% own 18% of private wealth, the bottom 50% own only 7% of it. By contrast there are between 30,000 and 40,000 homeworkers working on rundown estates in London who are employed doing sewing and packing for a piece rate of 50p a skirt or 6p for packing a dozen pairs of stockings. There are Asian women working in factories in Walsall for £30 for a full week's work.
Nor is it just in the back street sweat shops that exploitation is rife. One of the consequences of redundancies is usually a cut in wages for those workers lucky enough to find another job, and since redundancies have been going on for a whole decade on a regular basis, real average wages have gone down drastically. Besides the last few years have seen the abolition of wage councils protection for young workers.
Homelessness has been making the headlines over the past two years or so, so have home repossessions. At the same time working-class ghettoes, like the inner-cities which erupted in riots in 1980-81, are developing again.
The picture is even more striking in the richest country in the world, the USA, where 40m people have no health insurance at all, either because they never subscribed or because the scheme they subscribed to went bust. Not that the US government does not spend money on health, in fact it spends proportionally more than the British government. But the state health schemes only benefit certain categories of people, particularly the middle class. No wonder therefore the USA has the highest infant mortality in the industrialised world. Or that reported cases of tuberculosis rose last year in New York State alone to more than 4,000, while health care funds for treating TB have been slashed.
Homelessness is rampant in the US too. For instance in Detroit, the home of the US motor industry and one of the areas worst hit by factory closures, 30,000 are living on the streets surviving off soup kitchens, 5,000 evictions having taken place on last November the 1st alone! In Michigan, as also in California, the state has intervened to cut off social benefits to 170,000 of the poorest citizens in order to reduce public spending....
In the whole industrialised world the economic crisis of the past twenty years has introduced a sophisticated form of social apartheid. Whole working-class communities have been gradually marginalised by having no prospect at all of ever finding a job again, by being deprived in various ways of the social protections that were introduced after the war and are now coming to the point where their conditions are close to what used to be considered as typical of Third World countries. The gap between the rich countries' working class and that of Third World countries has probably never been as narrow as it is today.
....While the Third World poor bear the brunt
Since 1981 the pressure of debts on the Third World has increased even more, enlarging further the gap between rich and poor countries. Today the Third World accounts for 80% of the world's population but less than 18% of the world's income. The poorest Third World countries, that is most of black Africa, Central America and the Indian Sub-Continent, contain 56.5% of the world's population but only 5.4% of world income...! These ruined continents are the direct result of the workings of capitalism operating on a world scale.
The doubling of Third World debt in the 1980s has in effect made these countries the pawns of the IMF and the World Bank and through them of the capitalists of the rich countries. Since then, the 1985 Brady plan has given no alternative to these countries than to sell what little state economy they had in order to ease off their debt burden. The result has been a growing de-industrialisation of the Third World.
This has produced declining living standards not only in the poorest of the poor like Bangla Desh, with its 125m inhabitants and a total annual output worth half the amount spent annually on Coca Cola and Pepsi in the USA; but also in South American countries which until a generation ago were considered to be relatively prosperous.
Argentina is a typical example. There the local bourgeoisie sent massive amounts of capital abroad. This has starved the country of investments with, for instance, a drop of industrial output of 20% between 1975 and 82 and a 40% increase in unemployment among industrial workers. Between 81 and 89 a series of unsuccessful austerity plans were monitored by the IMF with disastrous results for the population. In July 89 one dollar was worth 650 Australs. By Feb 90 it was worth 6000 australs while average wages for industrial workers had sunk to £45 per month. By that time to attract investors, banks offered up to 4000% interest rates.
Peru provides a similar picture as a result of the "Fujishock" plan implemented under IMF control. In 1990 the minimum wage was down to 90% of that in 1975 in real terms, oil prices had increased by 3000% and 1100% for bread, the most basic of commodities. The ensuing cholera epidemic - which had previously been banished from the land for more than a century - was largely due to the collapse of the health and water system. It has since spread to neighbouring countries in this malnourished continent.
The greatest success of the IMF in South America appears to have been in Bolivia where the austerity measures have succeeded in wiping out the country's one major industry, namely tin mining. Today, only the coca economy provides the dollars needed for basic imports. While the IMF offers high praise for Bolivia's "progress" - an annual growth of 2-3% and inflation down from 60,000% six years ago to less than 14% - it suitably forgets to mention the part played by coca.
Together with the extreme poverty of the Third World's ever-growing shanty-towns, the world market has brought another one of its plagues, the stock markets' gloss. Financial newspapers are full of praise for the performances of some of the Third World stock exchanges. Thus, in 1991, share values increased, in dollar terms, by 403% in Brazil, 169% in Argentina and 120% in Mexico. Yet no-one bothers to mention the fact that this sudden and unexpected financial buyoancy is nothing but the artificial by-product of state companies being sold off, nor that it certainly reflects no increase in productive activity but rather the opposite.
For all the noises made by Western governments, mainly for the benefit of their own electorate, pretending to help the poor in the Third World, the knot is tightening around the Third World population's neck.
The very notion of a Third World debt is a cynical lie in the first place. Over the past decade, the Third World has repaid its debts to the West several times round, through paying interest rates that even Barclays would never dare to impose on its cardholders; through forced imports from Western countries of obsolete goods at prohibitive prices; through the plunder of the Third World's natural resources which still goes on, only on a larger scale, just as in the old colonial days.
But the lie goes on and Western banks, companies and states keep on bleeding the populations of these countries to extract whatever profits they can make out of their deprivation. For the Third World poor, this is the only meaning of capitalism, market forces and their on-going crisis.
What sort of future is it worth fighting for?
Over the past 63 years, since the 1929 crash, the world has lived through a continuous economic crisis. From the social wastage and the deprivation of the Great Depression it went into the worst butchery in history; and from there into the artificial respite of the so-called postwar "boom" which only concealed the same old problems and contradictions while they were piling up beneath the surface. When these problems eventually broke out violently in the early 70s, the capitalist system started going from crisis to crisis in its constant search for new profits.
What happened in the 30s, what we have experienced since the early 70s and what we are experiencing today, is simply the continuation of the same crisis, the crisis of capitalism, with the same symptoms, the same instability, the same unpredictability. In the 50s and 60s, capitalism proved unable to develop the world's resources in order to fight against starvation and under-development in the Third World, on the contrary under-development got worse and starvation spread even more. Today it is proving unable to prevent the on-going deterioration of conditions of living throughout the world. And whether yesterday and today, it has proved incapable of doing without the unacceptable human and social cost of constant wars.
There is every reason to think that tomorrow it may well prove incapable of preventing another worldwide catastrophe such as the Great Depression and its consequences, the enslavement of whole populations under fascism and world wars. Conditions may be different today from those of the 30s, but they do not make the ruling capitalist class any more capable of controlling its own economic system than it was 60 years ago. They can only make the scale of a possible new catastrophe immensely larger and more deadly, if it were to happen.
And even if such a catastrophe does not happen in the coming years, what sort of life has capitalism in store for us? Standards of living slowly eroded in the name of the need to avoid an even worse slump? High unemployment becoming a permanent feature? A growing section of the working class being marginalised and turned into pariahs? Violence growing out of deprivation and becoming more and more a feature of our day-to-day life? Maybe, a wave of anti-foreign jingoism to protect "our" British economy, as they say? Or more restrictions placed on workers' rights in the name of keeping production costs down? What sort of a future is this?
Those who pretend to speak in the name of the interests of the working class while telling us at the same time that instead of rocking the boat, we should keep our heads down and hope for better times, are, in reality, telling us that we should accept such a future. Because there won't be better times, at least not as long as the profit makers have their way and run the world like they have over the past 60 years.
And if this is the best kind of future they have on offer, then the working class has nothing to lose whatsoever in fighting it and its pro-capitalist promoters, and fighting it now.
For a communist future
All along the various stages in the economic crisis of the past twenty years, the capitalist system has shown a remarkable consistency. Wherever the market forces - in other words, the drive for profits which is the very basis of capitalism - turn their activities, they always create new problems, new tensions, new crises, while deepening the ones already existing. It is not out of any evil nature, it is not due to the incompetence of those in charge, it is not even due to wrong policies being implemented. It is simply due to the fact that the search for short-term personal profits cannot at the same time take into account the long-term collective interests of society. One contradicts the other and there is no way around this obvious fact.
The present capitalist crisis only reflects the inability of capitalism to cope with a world economy which operates internationally, through complex mechanisms involving millions of people at a time, and which, for that reason, would require the most careful and scientific organisation to take all factors into account. Instead of that, the only kind of organisation capitalism has to offer comes down, in the end, beneath the more sophisticated forms it may take today, to the selfish gut reaction of individuals grabbing the opportunity of making a quick buck for themselves.
Such a mode of operation may have been suitable at a time when the world economy was built on simple relationships between individuals, it may still have been suitable when whole areas of the world were still free open markets in which there was plenty of space to launch new production as well as sell new products.
But today, things are different. Even the smallest European village can no longer function without the cooperation of millions of workers scattered throughout the world - whether for electricity, coal, oil, cars, building materials, timber, books, newspapers, etc...
The world has long become too complex to be operated by irrational forces like those underlying capitalism. The persistance of the capitalist system, that is the persistance of the rule of irrationality over society, just cannot work.
The advocates of capitalism are only promoting the irrationality of the past against the needs of today's society. We need a rational society, organised collectively according to the interests of all. Capitalism has proved incapable of making the best of the existing resources of this world, let alone of developing new ones without any other preoccupation than the collective interest. But this is precisely what communism is about.
This is why we think communism is and will be the future of humanity, and that it is the only future worth fighting for. And this is a fight that we cannot afford to postpone.