Hard-headed economists across the ideological spectrum are agreed now that the present economic crisis is not a short term one and will not go away anytime soon contrary to the initial assertions of the pundits. Comparisons with the Great Depression have also been common across the spectrum. It is in the identification of the cause that there are several Great Divides.
Lesser mortals who do not have a sacerdotal role in the current structure and environment of policy-making, often contemplate the contours of a shift from the neoliberal consensus which has already started breaking down in many parts of the world though our rulers in India are yet to admit to themselves that this is indeed happening. Amidst the various states of denial, two things are significant: First, the portrayal of the present crisis as one that is impacting the US and the developed countries and much more contest about the impact of the crisis in Asia, Africa and Latin America. Second, those who have no stake in playing down the crisis in these parts of the world have urged for a Keynesian alternative to neoliberalism as the first step forward for a way out. For this once again, the overarching defining reference point has been the Great Depression for Keynesian economics found its legitimacy in those tortuous times. So revisiting the Great Depression and the debates around the impact of the Great Depression on the various societies of what would a couple of decades later become the Third World is worth a recount and readers will have to bear with a series of posts with thought-in-progress around this broad topic.
Most economists now acknowledge that the ‘free movement of capital’ can open up economies to high degrees of vulnerability after the experience of the East Asian financial crisis. Moreover, many economists having diverse views on ‘neoliberal globalisation’ have argued that the flow of capital led by the ‘chaotic’ signals of a highly integrated but anarchic market can often be ‘irrational’. In fact, ‘irrational exuberance’ was a phrase coined by Alan Greenspan (1996) chairman of the US Federal Reserve as a feature of ‘advanced country’ financial markets. The ‘irrational’ aspects of speculative and herd behaviour even in sophisticated and competitive financial markets have been implicated in the financial crisis following the ‘Black Monday’ crash of 1987 and the financial crisis in Japan that started with a share price collapse in January 1990. The same assumption informed the official IMF line on resolving and preventing crisis in the quote they used in their summative report in 2001 from Charles Mackay’s 19th century Extraordinary popular Delusions and the Madness of Crowds:
Men, it has been well said, think in herds: it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one (IMF 2001: I).
However, while the (occasional) irrationality of financial markets is now widely accepted in mainstream academia, its explanation has largely been based on ahistorical behavioural analysis and does not permit any historical or structural analysis. Apart from Marxists writers like Foster, Tabb and Patnaik, two commentators on the East Asian crisis provided accounts, which challenged this simplistic analysis of mainstream economics and both of them are now in the centre of attention. One was Joseph Stiglitz, previously Chief Economist at the World Bank. The other was Paul Krugman, trade adviser to US governments. They argued that many of the features of the ‘globalisation’ of the current epoch are the results of politics. The reduction of national controls on capital movements were driven by political pressures from the International Monetary Fund (IMF), the World Trade Organisation, the US government and the metropolitan banks interlocked with metropolitan trans-national companies. They both argued that it was their interest and intervention that created the financial structure responsible for the disastrous outcome of the 1997-98 financial crises in East Asia and Russia.
Private credit increased in international finance since the mid-1960s with private capital from OECD countries emerging as key lenders. The Organisation of the Petroleum Exporting Countries (OPEC) was a less important lender, but ‘petro-dollars’ were channelled into the international debt market through European banks . The growth of global lending and capital flows in the 1960s was not smooth. The most important contradiction arose from the international ‘reserve currency’ status the US dollar, leading to the breakdown of the Bretton-Woods system of fixed exchange rates between 1971 and 1973. Just as the Great Depression was indicted as failure of laissez faire, this crisis marked the end of Keynesian interventionism. For the Third World, a further shock came with the ‘debt trap’ created by the lending policy of trans-national banks in Third World countries .
The IMF itself recognised in 2001 :
In recent years one of the most spectacular manifestations of globalization has been the rapid expansion of international private capital flows--investments and loans from one country to another. These flows have brought significant economic benefits, but they have also exposed countries to periodic crises of confidence when inflows of capital are suddenly reversed.
But ‘crisis’ in this reading was considered the sole preserve of the economies of the ‘South’ due to their ‘crony capitalism’. What goes unsaid is that there have been about 70 financial crises in the past two decades. Since 1980, three quarters of IMF members have experienced financial crises. Of the 70 or so crises, Kregel documents that one third has taken place in the so-called developed economies.
This is not just to flag the obvious – financial crisis in recent times has been a sine qua non of the kind of capitalism and by definition the imperial order ushered in through neoliberalism, but to flag off a more basic point – that the specific nature of so-called footloose finance capital of our times in the delocking of finance from industrial capital as opposed to the amalgamation that formed the basis of early 20th century monopoly capital actually creates limits on the possibility of the extent of ‘independent’ economic policy at the level of the nation state. At the same time, the nation state has remained the fundamental basis of the organisation of present day capitalism. This contradiction has meant that capitalism has been on fire-fighting mode repeatedly whether in the centre or the periphery in finding national solutions to the international crisis of finance capital.
But not every crisis leads to recession and then depression. It is in this regard that the Great Depression remains the immediate historical reference point. But it has been the question of assessing the cause of the Great Depression that the problematic has been always reduced to either the US economy as in the early literature in economics assessing the cause of the Great Depression and in the later, the World Economy defined in terms of impact as the economies of for example Austria, Canada, France, Germany, Sweden, Japan and Great Britain, economies in which industrial production fell much faster than in the US in the first year between 1929 and 1930 though the fall in GDP according to Angus Maddison was the highest in the US .
Within the discipline of economics, we have three kinds of analysis – the first consists of short run theories that attribute the Depression to lack of business confidence or trust as economists call it today i.e. loss of trust in the financial structure and offering explanations for the same; the second derives from the first, but sometimes going beyond the usual kind of rarification that wishes away the structural in favour of behavioural explanation irrespective of structure focuses on an instrumentalist notion of states and markets pondering on whether the state got it right and made the right interventions in technical policy terms. In both these views, we find a consensus on when exactly North American and European economies had gone into depresssion and when their ‘recoveries’ began.
The table below presents the mainstream consensus on the Great Depression and the period of crisis:
|Country||Year:Quarter in which Depression began||Year:Quarter in which Recovery began|
By this view, the depression in the US started in Q3 1929 and recovery began in Q2 1933; in the UK it started in Q1 1930 and recovery started in Q4 1932. Canada and Germany (in Germany it started in Q1 1928) the economy was hit by the Depression before it hit the US. In Italy, Belgium, Argentina, Poland, Brazil it started with the US in Q3 1929. As far as recovery is concerned, the US was the last to embark on recovery in Q2 1933 along with Canada, Czechoslovakia, Denmar and Poland. According to this view, the crisis began in the 1st quarter of 1928 in Germany, in the 3rd quarter of 1929 in the US and by 1930 most European economies were in crisis. Recovery began by the second quarter of 1932 and all economies were on the path of recovery by 1933. One cannot but notice the similarity of these debates with the kinds of debate we are having today. It is also very clear that the predictions about the recovery period today are informed by this technoeconomic view of economic crisis in general and the Great Depression in particular.
The third took a longer historical view from a political economy perspective and pointed to, for example, the Treaty of Versailles and the demise of the Gold Standard. It stressed the role of France and the US that Germany make her reparations payments in Gold rather than goods and services and Great Britain’s attempts to preserve the Gold Standard, but in the end having to let go because of pressures from its own bankers in the city who refused to be subservient to the Bank of England which, by the way, was also a private bank with bankers from the City on its board.
And then there was Keynes himself and Hansen and many others who looked at systemic aspects in the stagnation of the period before due to market contraction and the limits on new technology or new product driven new investment and the political resistance to deficit spending to augment consumer purchasing power. There were a few others like Seymour Harris and Paul Sweezy coming from hugely different ideological perspectives who focussed on the increasing social inequality in American society in the pre-depression years (in the case of Harris who was economic advisor to John F Kennedy) and in the history of American monopoly capitalism in general (in the case of Sweezy) as a primary cause of not just the Depression itself but its severity and its impact.
When Kindleberger wrote his book as a departure from the usual paradigm of looking at the Great Depression as something specific to the US to looking at the crisis as a crisis of the world economy or in other words capitalism, he also limited himself to studying Europe. The emerging Third World hardly figured in his account. For a respected Keynesian economist who was one of the revered team that had rescued post World War II European capitalism that was fast losing its economic and political stranglehold over its colonies through the Marshall Plan, that his 'world' would consist of just the Western capitalist economies, is not surprising.
In the contemporary age of political correctness, as more and more literature is produced on the Great Depression from metropolitan academia, it is interesting to note that the earlier occlusion of the world beyond North America, Europe and to a lesser extent Japan is now ritually acknowledged and then the same occlusion follows. A few works on the impact on Asia, Africa and Latin America conclude that these economies were not seriously affected based on amusing propositions like these economies were protected because they were not integrated in the circuits of finance or trade and then in a self-reinforcing cycle other scholarship cites this proposition to defend the occlusion to not even assess the channels of impact. Thus the claims of the new approach are completely oblivious to colonial trade and financial relations. The Great Depression was a global phenomenon and every economy linked to international financial and commodity markets suffered, but the suffering of the masters obviously had been the immediate and long-term concern.
However, the causal connections and impact of the Great Depression are extensively documented in the economic, political and social histories of Turkey, Egypt, India, Brazil, Colombia, Chile, Peru, Argentina, Mexico, China, Java, Philippines, Vietnam, Belgian Congo, Kenya and Southern Rhodesia just to name a few. Reviewing these are beyond the scope of this post but for those interested in a brief comparative empirical survey, Dietmar Rothermund’s 1996 book The Global Impact of the Great Depression could be useful irrespective of political difference. The work on the impact on India is widely documented in Indian economic and social history, not to mention literature, poetry and memoirs and the wider arena of lived social experience articulated as both individual and collective memory.
At this point, I would like to introduce the main contention around which the posts in this series will be woven. If one said that the Great Depression was a key defining moment for the history of 20th century capitalism or rather imperialism, this would not be a novel proposition. But if that be so, then the appeals to unqualified Keynesianism as just a matter of a policy package alternative to laissez faire economics in its current avtar of neoliberalism holds little promise. Appeals to a ruling class, who want to be ‘bailed out’ by socializing their losses, to see wisdom in Keynesianism as a first step towards correction may also be misplaced. This is the key theme that I would like to pursue in these posts.
If indeed the Great Depression was a crisis of the imperialist order, recovery as economists envisage it in terms of industrial output patterns since 1933 or 1934 do not pay attention to the fact that the economic consequence of this path to recovery laid out the preconditions for both the rise of fascism and World War II. The Soviet Union which possibly was the only country not directly affected by the Great Depression also became affected by the War because of the threat of fascist aggression. The path to recovery also entailed so-called neutrality of the reigning imperial powers in the Spanish Civil War and thus condoning of a fascist regime for well over four decades.
Thus the cycle of war-peace-crisis-war-peace of the first 50 years of the 20th century was integral to the making of the Depression and subsequent recovery. And the only country that followed the more or less pristine path of a Keynesian recovery could do so by managing to remain protected from the mutually assured destruction of the Second World War. For much of Western Europe, it was attempts to recovery-crisis- attempts to economic recovery and crisis and finally war. They had to then depend on extensive aid-driven reconstruction through the Marshall Plan after 1945 for the long recovery that they themselves designated the Golden Age of Capitalism. Not only did the Marshall Plan formally seal the role of the US as the leader of the imperial order through its status of a reserve currency, it also laid the economic basis of the then Keynesian principles that defined the functioning of the International Monetary Fund, the International Bank of Reconstruction and Development and GATT which oversaw this recovery. And social democracy in Western Europe on Keynesian principles emerged as sustainable only under this new imperial order of sub-ordinated rivalry. The success of Keynesianism lay in rescuing capitalism by redefining the relationship between state and market that not only addressed concerns about the trend of increasing social inequality through public investment, but also charted out a sustainable course of imperial recovery that was sustainable for at least two decades – a long period in capitalism’s history of crisis.
But what did such paths of imperial recovery mean for making and unmaking of countries and peoples of the yet to become Third World? This will be the subject of musing in the next post.
 Change in Real GDP, 1929-1933 United States -29%, Germany -10%, France -9%, Italy -3%, United Kingdom-2%, Japan 11%. Data: Angus Maddison.