The relentless revolution: a history of capitalism (43 page)

Signals in the 1920s of impending economic trouble were decidedly mixed. No one predicted the major downturn that ensued. There had been the challenge of repairing the great losses of the war, a project undertaken by people utterly exhausted by the war itself. Still, the former belligerents had recovered their agricultural and industrial capacities within five or six years. What lasted longer were the distortions that the war caused. Feeding sixty-seven million men under arms had greatly challenged the world’s farmers. They met the wartime demands, heavily cropping and bringing new land into cultivation. The cessation of hostilities left these farmers with gluts of foodstuffs and raw materials. For many countries, especially in Eastern Europe, agriculture remained their economic backbone. When an agricultural depression ensued, whole economies teetered on the edge of collapse.

The new nations of Hungary, Austria, Bulgaria, Romania, Yugoslavia, and Czechoslovakia made recovery of international trade more difficult by abandoning the free trade that those in the Danube basin had enjoyed as members of the Austro-Hungarian Empire. Seeking the impossible goal of economic self-sufficiency, these new nations raised high tariffs against one another’s imports. Even transportation from one country to another was made difficult.
¹
And then there were the money problems. Reparations, war debts, and paper money substitutes for gold triggered inflation almost everywhere. Germany suffered from hyperinflation. In May 1922 it took 275 marks to buy one U.S. dollar; by November it required 7,000. Those who lived off pensions and returns from bonds, rents, or savings were almost wiped out, but creditors and German companies like Thyssen and Stinnes were able to pay off their debts with cheap money.
²
The costliest legacy of the war was the popular preference for revenge over help in nursing a wounded world back to normal. This made the scarcity of enlightened leadership conspicuous.

The so-called Roaring Twenties typically roared for people coming of age in the 1920s. Their older brothers and sisters were more likely to be dispirited, if not cynical and wounded. People in the United States suffered many fewer casualties from the country’s brief twenty months in the conflict. It soon became evident that the war had killed more than people; it had finished off many traditional values, especially those affecting the relations of men and women. Women’s bobbed hair and short skirts announced a freer social spirit. Fertility had been declining throughout the Western world since the 1870s, with families in the United States half the size—fewer than four children—at the end of the nineteenth century as at its beginning.
³
Such a shift affected women more than men. If one thinks of women’s liberation as having a long gestation period, this decrease in fertility can stand as a beginning. More timesaving appliances, the proliferation of white-collar jobs, and the experience of wartime employment outside the home also need to be included as liberating forces. By 1925 most economies were moving into prosperous times. And with them came a social style in full revolt against the straitlaced mores of the Victorian age.

The famous logo for the phonograph, a popular component of the new cultural style, featured a dog listening to “his master’s voice.” More likely the phonographs blared out the jazz music coming from the American black community. That community too was on the move, sending its young people up north. Movies with sound tracks replaced the silent films. The United States got its first commercial radio station in 1920. Within a decade more than half the American homes boasted a radio.
⁴
Even in Germany and Great Britain, almost three million families had radios by 1929. Rural isolation was vanishing. In the midst of this rather raucous public space of the 1920s, the New York Stock Exchange began its “great bull market.” As stock prices rose, moneyed people began to pull out of their European investments and buy American securities. In typical bubble fashion, prices went up, up, up, drawing in more eager investors with every record set.

The First World War jumbled things up in the Pacific as well as in the rest of the world. Japan had won inclusion in the group of leading European imperialist powers that divvied up Africa in the Berlin Conference of 1885.
⁵
Its decision to go to war for dominance in East Asia fitted in well with the spirit of the times. Although aligned with the Allied powers, Japan did little fighting and a lot of producing. Its economy benefited from Allied orders for munitions and other war materials. The removal of Western competition in both its domestic and mainland Asian markets could also be considered another dividend from the war.

The inevitable slump after World War I extended through the 1920s in Japan. Early in its push for modernization, the government had favored large firms that could be depended upon for capital and conformity to national goals. During the 1920s every Japanese industry formed cartels to ward off undue competition in difficult times. More giant firms emerged like Nissan in the 1930s with its ambitious plans to turn out fifteen thousand automobiles a year. Various holding companies moved into mining, chemicals, fisheries, marine transport, and civil engineering. When Nissan produced its first passenger cars, the company’s motto was “The Rising Sun as the flag and the Datsun as the car of choice.”
⁶

In Europe, the aftereffects of the war were as much emotional and intellectual as material. Being on the winning side didn’t save Italy from a parlous postwar situation that opened up Italians to radical political ideas. A socialist journalist named Benito Mussolini built a career and a new party by advertising the defects in the West’s liberal system of electoral politics and self-correcting markets. The Fascist movement Mussolini launched carried him to power in 1922. Having moved sharply to the right, he worked quickly to silence opposition, steamroller Parliament, and suppress workers’ unions along with any other kind of independent political activity. Mussolini organized employers and workers into confederations whose relations the government mediated. He used tariffs, quotas, and subsidies to shield the Italian economy as much as possible from world trade. What fascism offered was a lively nationalism to take the place of personal satisfactions. It knitted the country into a giant corporation in which individuals yielded to the good of the whole, as defined by Il Duce.

By 1935 Mussolini was ready to show what his Italy could do outside its borders. He invaded Ethiopia, which had successfully repelled the Italians forty years earlier. For this act of sheer aggression, the League of Nations imposed sanctions, but its member countries proved unwilling to sustain any sacrifice, especially a loss of oil sales to Italy. Mussolini called the League’s bluff, and it fell along with Ethiopia. A virile masculinity, suggestive of violence, came to represent strength in contrast with the weakness of the rest of Europe with its faith in civil liberties and individual decision making. Mussolini’s corporatism and economic self-sufficiency, laced by investments in a military buildup, brought Italy out of the depression looming on the American and European horizon.

A Spreading World Depression

Two slow, inexorable movements help explain the increasing severity of economic downturns, exemplified by the depression that began in the early 1930s. Men and women—usually young—moved from rural jobs in farming and services to the urban industrial centers, and national firms became more and more connected to a world market. Both developments signaled progress, but they also exposed more and more people and firms to disruptions from faraway places. Nations had less and less control over their economies. Another feature of capitalism kicked in to make these downturns painful in their suddenness. This can be traced directly to the optimism that is integral to free enterprise. Participants have to imagine attractive earnings to keep investing their time and resources in future outcomes. One way to keep hope alive is to ignore distant clouds and focus on the sun that is still shining. It’s hard to balance optimism with caution. Underneath the many particularities of the stalled years of the 1930s were the general trends of greater global integration and an insistent go-ahead spirit.

The big question about the Great Depression is not why it occurred—such downward slides in economic activity had become regular features of the market economy—but rather why the normal rebound didn’t take place. Why, as one contemporary commented, did the world economy pass from a cycle to a crisis to a chute as businesses went bust and some national unemployment rates rose as high as 30 percent. Unsold inventories stacked up in warehouses and barns; the price of cotton, wheat, sugar, wool, coffee, silk, rubber, butter, rice, tobacco, and corn stagnated from one harvest to the next. The consequent discouragement, fear, and pessimism encouraged saving instead of spending, one of the perversities that make bad times worse. Despite all the efforts to remedy these adverse conditions, the recoveries that did occur didn’t last. One day people would agree with relief that things had bottomed out only to watch sales and prices plunge downward anew. To explain all this, there was a stunning variety of opinions from monetarists, market stabilizers, interventionists, planners, corporatists, and advocates of laissez-faire, the philosophy of letting things alone.
⁷

Today, almost eighty years after the Great Depression, there is still no consensus among experts about its causes. Most people agree on the relevant factors: gluts of farm commodities and raw materials, insufficient purchasing power for the amount of factory goods being produced, an unstable financial system, high tariffs, the one, two punch of a speculative stock mania followed by near-zero investments, and, of course, the powerful aftershocks from the First World War. And yet with all these dangers, few foresaw that their economies were going to swoon. In fact international trade and industrial production rose almost 20 percent higher in 1929 than they had been in 1925.

One thing that the experts do agree upon is that the precipitous drop in American stock prices on Black Tuesday, October 24, 1929, didn’t trigger the Depression, largely because the causes had kicked in earlier and been ignored in the general euphoria of a rising stock market. The crash led to a lot of financial distress and heartbreak as the index of stock market prices skittered from a high of 381 to 199 in three weeks on its way down to 79 two years later. Of more immediate influence on the Depression was the loss of confidence in banks—big-city banks, country town banks, central banks. Banks had proved very convenient in serving the needs of savers and borrowers. They held people’s money safely, paid interest, and gave them instant access to it. They lent money for new ventures, usually more money than they had on hand at any given time. This made banks peculiarly vulnerable to a run of depositors wanting their money at the same time that they feared for the safety of their savings. Such runs were exactly what happened throughout the capitalist world, especially in the United States when nine thousand banks closed their doors between 1930 and 1933. In Germany the entire banking system collapsed.

Progress had seemed unstoppable until the Great Depression. It was particularly hard on the United States because its economy depended more upon consumers, whose reactions were harder to read, than it had earlier. The stock market crash of 1929 produced headlines about investors jumping to their deaths from the tops of high buildings, but the people who really hurt from the ensuing depression were already at the bottom—or near there. Layoffs that had been seasonable now became permanent, as people lost confidence and stopped buying. Savings and retirement plans disappeared into foreclosures, evictions, and bankruptcies. Whole families found themselves unemployed. The charitable network of ethnic mutual aid societies and church welfare was strained to the breaking point. Unlike European countries, the United States had relied upon private relief when the economy turned sour. The Great Depression revealed its inadequacy.

Single men tramped the country, looking for work, often “riding the rails” from city to city where “hobo towns” formed on their fringes.
⁸
These were often called Hoovervilles in reference to President Herbert Hoover, who was blamed for letting the good times slip away on his watch. Manufacturers were thrust into a catch-22. As they lowered prices to compete for new customers, they suppressed the wages of their workers. With little to spend outside of bare necessities, these men and women became a drag on the consumer side of the economic equation. The ignored plight of workers during these years fostered the formation of brigades of capitalist critics who marched under the banners of socialism, unionism, regulation, economic justice, or nostalgic calls to return to the farm.

The world economy was very much a ship adrift without a captain. Great Britain, the capitalist trailblazer since the eighteenth century, had long exerted leadership, especially in monetary exchanges and international bank loans. Other national currencies were measured against the British pound sterling, in part because the Bank of England gave a fixed amount of gold for the pound. By 1931 Britain could no longer sustain this commitment and went off the gold standard, as did the United States. Twenty-six other countries joined them a year later, meaning that they no longer backed their currencies by gold. A crazy quilt of currencies now appeared, the free-floating British pound and the American dollar among all the wildly fluctuating others. The gold standard, which most capitalist countries had adopted in the 1880s, no longer existed to facilitate the settling of international accounts. All this might not have hurt so much had most economies not depended upon international trade to keep their economies humming. A depression of epic proportions had arrived.