Spartacus Blog
Crisis in British Capitalism: Part 1: 1770-1945
In 1771 Richard Arkwright built a large factory next to the River Derwent in Cromford, Derbyshire. He filled his factory with a large number of Water-Frame machines. Arkwright later told his lawyer that Cromford had been chosen because it offered "a remarkable fine stream of water… in a an area very full of inhabitants". (1) Arkwright's machine not only "spun cotton more rapidly but produced a yarn of finer quality" than had previously been possible. (2)
Arkwright did not build the first factory in Britain. It is believed that he borrowed the idea from Matthew Boulton, who financed the Soho Manufactory in Birmingham in 1762. However, Arkwright's factory was much larger and was to inspire a generation of capitalist entrepreneurs. According to Adam Hart-Davis: "Arkwright's mill was essentially the first factory of this kind in the world. Never before had people been put to work in such a well-organized way. Never had people been told to come in at a fixed time in the morning, and work all day at a prescribed task. His factories became the model for factories all over the country and all over the world. This was the way to build a factory. And he himself usually followed the same pattern - stone buildings 30 feet wide, 100 feet long, or longer if there was room, and five, six, or seven floors high." (3)
Richard Arkwright soon became extremely wealthy and within a few years was worth £500,000 (over £200 million in today's money). This wealth encouraged others to enter the market. To stay ahead of the competition he considered the possibility of buying up the world's cotton crop. He was unable to do this but he did set up a company to establish cotton plantations in Africa. (4)
Arkwright and other entrepreneurs were helped by the growth of the British Empire. At this time Britain used companies such as Hudson's Bay Company, Royal African Company and the East India Company to dominate world trade. The British government became jealous of the large fortunes being made in India and in 1767 they insisted on taking a direct share of the plunder, and the East India Company was forced to pay £400,000 a year into the Exchequer. This was followed by the Regulating Act of 1773 and the East India Company Act 1784 that secured the government a partial control over the administration of the conquered provinces. (5)
Adam Smith and Capitalism
The building of large factories in Britain marked the beginning of modern capitalism. In 1776 the moral philosopher, Adam Smith, published the world's first book on economics. In Inquiry into the Nature and Causes of the Wealth of Nations, Smith outlined the advantages of capitalism. He claimed that the capitalist was motivated by self-interest: "He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.... It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages." (6)
Smith argued that capitalism results in inequality. For example, he wrote about the impact poverty had on the lives of the labouring class: "It is not uncommon... in the Highlands of Scotland for a mother who has borne twenty children not to have two alive... In some places one half the children born die before they are four years of age; in many places before they are seven; and in almost all places before they are nine or ten. This great mortality, however, will every where be found chiefly among the children of the common people, who cannot afford to tend them with the same care as those of better station." (7)
Smith demanded government intervention to protect the labouring classes: "The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life... But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it." (8)
Adam Smith pointed out the dangers of a system that allowed individuals to pursue individual self-interest at the detriment of the rest of society. He warned against the establishment of monopolies. "A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate." (9)
Karl Marx began writing about capitalism in the 1844. His first manuscript begins with the simple declaration: "Wages are determined by the fierce struggle between capitalist and worker. The capitalist inevitably wins. The capitalist can live longer without the worker than the worker can without him." The only defence the workers have against capitalism is competition, which enables wages to rise and prices to fall. Marx agreed with Adam Smith that there was a tendency for monopolies to be created and this undermined the power of the workers: "The big capitalists ruin the small ones and a section of the former capitalists sinks into the class of the workers which, because of this increase in numbers, suffers a further depression of wages and becomes ever more dependent on the handful of big capitalists. Because the number of capitalists has fallen, competition for workers hardly exists any longer, and because the number of workers has increased, the competition among them has become all the more considerable, unnatural and violent." (10)
Marx argued that even in times of economic growth, conditions do not get better for the worker. The only consequence is "overwork and early death, reduction to a machine, enslavement to capital". The worker is in competition with the machines. "Since the worker has been reduced to a machine, the machine can confront him as a competitor. The accumulation of capital enables industry to turn out an ever greater quantity of products. This leads to overproduction and unemployment.
Karl Marx and Friedrich Engels published The Communist Manifesto in 1848. The pamphlet begins with the assertion: "The history of all hitherto existing society is the history of class struggles." Marx and Engels argued that if you are to understand human history you must not see it as the story of great individuals or the conflict between states. Instead, you must see it as the story of social classes and their struggles with each other. They explained that social classes had changed over time but in the 19th century the most important classes were the bourgeoisie and the proletariat. By the term bourgeoisie Marx meant the owners of the factories and the raw materials which are processed in them. The proletariat, on the other hand, own very little and are forced to sell their labour to the capitalists. (11)
Marx believed that these two classes are not merely different from each other, but also have different interests. He went on to suggest that the conflict between these two classes would eventually lead to revolution and the triumph of the proletariat. With the disappearance of the bourgeoisie as a class, there would no longer be a class society. "Just as feudal society was burst asunder, bourgeois society will suffer the same fate." (12)
The first volume of Das Kapital was published in September 1867. A detailed analysis of capitalism, the book dealt with important concepts such as surplus value (the notion that a worker receives only the exchange-value, not the use-value, of his labour); division of labour (where workers become a "mere appendage of the machine") and the industrial reserve army (the theory that capitalism creates unemployment as a means of keeping the workers in check). "The result was an original amalgam of economic theory, history, sociology and propaganda". (13)
Marx also dealt with the issue of revolution. Marx argued that the laws of capitalism will bring about its destruction. Capitalist competition will lead to a diminishing number of monopoly capitalists, while at the same time, the misery and oppression of the proletariat would increase. Marx claimed that as a class, the proletariat will gradually become "disciplined, united and organised by the very mechanism of the process of capitalist production" and eventually will overthrow the system that is the cause of their suffering.
Paul Samuelson, one of the leading economists of the 20th century, has declared that Marx's theories can safely be ignored because the impoverishment of the workers "simply never took place". However, Francis Wheen argues that this view is based on a misreading of Marx's "General Law of Capitalist Accumulation" where he makes clear that he is "referring not to the pauperisation of the entire proletariat but to the 'lowest sediment' of society - the unemployed, the ragged, the sick, the old, the widows and orphans". The main point that Marx was making was that labour always "lags further and further behind capital, however many microwave ovens the workers can afford." (14)
At first Marx thought the revolution would first take place in Britain as we were the most advanced industrial society. However, he changed his mind after the Franco-Prussian War in 1870. Marx believed that a German victory would help his long-term desire for a socialist revolution. He pointed out to Engels that German workers were better organised and better disciplined than French workers who were greatly influenced by the political ideas of Pierre-Joseph Proudhon: "The French need a drubbing. If the Prussians are victorious then the centralisation of the State power will give help to the centralisation of the working class... The superiority of the Germans over the French in the world arena would mean at the same time the superiority of our theory over Proudhon's and so on." (15)
After his victory over the French, Otto von Bismarck, the President of Prussia, acted immediately to secure the unification of Germany. He negotiated with representatives of the southern German states, offering special concessions if they agreed to unification. The new German Empire was a federation made up of 25 constituent states. Germany occupied an area of 208,825 square miles and had a population of more than 41 million. Whereas in 1871, Britain occupied 94,525 square miles with a population of 21 million. Jonathan Steinberg has argued: "The genius-statesmen had transformed European politics and had unified Germany in eight and a half years. And he had done so by sheer force of personality, by his brilliance, ruthlessness, and flexibility of principle." (16)
Bismarck gained support for unification by allowing all men over the age of 25 the vote. Bismarck came to the decision that the best way of preventing socialism was by introducing a series of social reforms including old age pensions. In 1881 he announced that "those who are disabled from work by age and invalidity have a well-grounded claim to care from the state." When the issue was debated Bismarck was described by his critics as a socialist. He replied: "Call it socialism or whatever you like. It is the same to me." It has been argued that Bismarck's intention was to "forge a bond between workers and the state so as to strengthen the latter, to maintain traditional relations of authority between social and status groups, and to provide a countervailing power against the modernist forces of liberalism and socialism." (17)
In 1883 Bismarck introduced a health insurance system that provided payments when people were sick and unable to work. Participation was mandatory and contributions were taken from the employee, the employer and the government. The German system provided contributory retirement benefits and disability benefits as well. Germany was therefore the first country in the world to provide a comprehensive system of income security based on social insurance principles.
Bismarck explained: "The real grievance of the worker is the insecurity of his existence; he is not sure that he will always have work, he is not sure that he will always be healthy, and he foresees that he will one day be old and unfit to work. If he falls into poverty, even if only through a prolonged illness, he is then completely helpless, left to his own devices, and society does not currently recognize any real obligation towards him beyond the usual help for the poor, even if he has been working all the time ever so faithfully and diligently. The usual help for the poor, however, leaves a lot to be desired, especially in large cities, where it is very much worse than in the country." (18)
Bismarck believed that this insurance system would increase productivity, and focus the political attentions of German workers on supporting his government. It also resulted in a rapid decline of German emigration to America. He also hoped that it would reduce support for the socialists. After the passing of the Old Age and Disability Insurance Law in 1889, Bismarck thought it was safe to legalize the Social Democratic Party. (19)
Following the 1906 General Election the Liberal government introduced Old Age Pensions and National Insurance. However, they feared that Germany would resort to war in order to challenge Britain's position as the leading nation in Europe. By 1911 Germany had a population of 67 million, nearly double the 33 million people in Britain. The British Empire covered more than 11,400,000 square miles of territory (24% of the Earth's total land area) with 23% of the world's population (410,000 million people). The German Colonial empire got its start around 1884, and in those years they acquired several territories. German East Africa, German South-West Africa, Cameroon, and Togo in Africa. Germany was also active in the Pacific annexing a series of islands that would be called German New Guinea. (20)
The British government became convinced that it was likely to go to war with Germany and concentrated on building massive battleships called dreadnoughts. In 1910, the British eight-ship construction plan went ahead, including four Orion-class super-dreadnoughts. Germany responded by building three warships, giving the United Kingdom a superiority of 22 ships to 13. Negotiations began between the two countries but talks foundered on the question on whether British Commonwealth battlecruisers should be included in the count. (21)
The arms race was a factor in causing the First World War. By the time it finished in 1918, Britain, France and Germany were all significantly weaker. It was the United States who was the main winner and was clearly the most economically powerful country in the world. It had lent large sums of money to Britain and France during the war and when it was paid back they invested in new technology, which again increased its levels of production. The other main change that had taken place was the Russian Revolution in 1917. Russia provided an alternative political and economic system but it was to be some time before it posed a threat to capitalism.
Two weeks after the end of the war, the British prime minister, David Lloyd George gave a speech in Wolverhampton: "‘The work is not over yet – the work of the nation, the work of the people, the work of those who have sacrificed. Let us work together first. What is our task? To make Britain a fit country for heroes to live in. I am not using the word ‘heroes’ in any spirit of boastfulness, but in the spirit of humble recognition of fact. I cannot think what these men have gone through. I have been there at the door of the furnace and witnessed it, but that is not being in it, and I saw them march into the furnace. There are millions of men who will come back. Let us make this a land fit for such men to live in. There is no time to lose. I want us to take advantage of this new spirit. Don’t let us waste this victory merely in ringing joybells." (22)
After the war the ending of price controls, prices rose twice as fast during 1919 as they had done during the worst years of the war. That year 35 million working days were lost to strikes, and on average every day there were 100,000 workers on strike - this was six times the 1918 rate. There were stoppages in the coal mines, in the printing industry, among transport workers, and the cotton industry. There were also mutinies in the military and two separate police strikes in London and Liverpool. (23)
The 1920s was a period of dramatic economic decline for Britain and increasing unemployment. It was 3.9% before the war but reached 16.9% in 1921 and remained high throughout the decade. The economist, John Maynard Keynes, believed that the government should experiment with "all kinds of new partnerships between the state and private enterprise" to have "a wages and hours policy" and to promote industrial training and labour mobility. Keynes argued in Britain's Industrial Future (1928) for the "comprehensive socialisation of investment". He proposed that the investment funds of the public concerns, whether borrowed or raised by taxation, should be pooled, and segregated into a capital budget, to be spent under the direction of a national investment board. He also suggested attracting new savings through the issue of national investment bonds for capital development, thus slowly replacing dead-weight debt by productive debt without increasing the outstanding amount of loans. "We have here, with the least possible disturbance, an instrument of great power for the development of the national wealth and the provision of employment. An era of rapid progress in equipping the country with all the material adjuncts of modern civilisation might be inaugurated, which would rival the great Railway Age of the nineteenth century." (24)
In 1928 Britain had over a million people out of work. Some members of the Labour Party thought that they needed to promise dramatic reform in the next election and favoured the reforms being suggested by Keynes. Richard Tawney sent a letter to the leaders of the party: "If the Labour Election Programme is to be of any use it must have something concrete and definite about unemployment... What is required is a definite statement that (a) Labour Government will initiate productive work on a larger scale, and will raise a loan for the purpose. (b) That it will maintain from national funds all men not absorbed in such work." Ramsay MacDonald, the leader of the Labour Party, refused to be persuaded by Tawney's ideas and rejected the idea that unemployment could be cured by public works. (25)
The Independent Labour Party (ILP), a left-wing pressure group within the Labour Party, argued for a policy that it called "Socialism in Our Time". The main aspect of this policy was what became known as the "Living Wage". The ILP argued that the provision of a minimum living income for every citizen should be the first and immediate objective. It called for the "legal enforcement of a national minimum wage adequate to meet all needs in all public services and by all employers working on public contracts, supplemented by machinery for the legal enforcement of rising minima on industry as a whole, as well as by expanded social services financed out of taxation on the bigger incomes, and by a nationally financed system of Family Allowances." MacDonald described the measure as "flashy futilities". (26)
In January 1929, 1,433,000 people in Britain were out of work. Stanley Baldwin, the British prime minister, was urged to take measures that would protect the depressed iron and steel industry. Baldwin ruled this out owing to the pledge against protection which had been made at the 1924 election. Agriculture was in an even worse condition, and here again the government could offer little assistance without reopening the dangerous tariff issue. Baldwin was considered to be a popular prime minister and he fully expected to win the general election that was to take place on 30th May. (27)
Economic Prosperity in the United States
The United States entered the 1920's in a strong economic position. The economies of her European rivals had been severely disrupted by the First World War and the United States had been able to capture markets which had previously been supplied by countries like Britain, France and Germany.
Companies in the United States also made full use of the system called "mass production". Between 1919 and 1929 output per worker increased by 43%. This increase enabled America to produce items that were cheaper than those manufactured by her European competitors. This enabled employers to pay higher wages. One politician pointed out: "I think our people have long realized the advantages of large business operations in improving and cheapening the cost of manufacture and distribution…. The more goods produced, the more share there is to distribute." (28)
The distribution of this new wealth was very unequal: "The average industrial wage rose from 1919's $1,158 to $1,304 in 1927, a solid if unspectacular gain, during a period of mainly stable prices... The twenties brought an average increase in income of about 35%. But the biggest gain went to the people earning more than $3,000 a year.... The number of millionaires had risen from 7,000 in 1914 to about 35,000 in 1928." (29)
The United States also pioneered techniques in persuading people to buy the latest products. The development of commercial radio meant that companies could communicate information about their goods to a mass audience. In order to encourage people to purchase expensive goods like motor cars, refrigerators and washing machines, the system of hire-purchase was introduced which allowed customers to pay for these goods by installments.
Andre Siegfried, a French visitor pointed out: "In America the daily life of the majority is conceived on a scale that is reserved for the privileged classes anywhere else... The use of the telephone, for instance, is very widespread. In 1925 there were 15 subscribers for every 100 inhabitants as compared with 2 in Europe, and some 49,000,000 conversations per day.... Wireless is rapidly winning a similar position for itself, for even in 1924 the farmers alone possessed over 550,000 radios.... Statistics for 1925 show that... the United States owned 81 per cent of all the automobiles in existence, or one for every 5.6 people, as compared with one for every 49 and 54 in Great Britain and France." (30)
The American economy appeared to be in such a healthy state that during the 1928 Presidential Election, the Republican candidate, Herbert Hoover, claimed that: "We in America are nearer to the financial triumph over poverty than ever before in the history of our land. The poor house is vanishing from among us. Under these impulses, and the Republican protective system our industrial output has increased as never before and our wages have grown steadily in buying power. Our workers, with their average weekly wages, can today buy two and even three times more bread and butter than any other earner in Europe." (31)
One way of making money during the 1920's was to buy stocks and shares. Prices of these stocks and shares constantly went up and so investors kept them for a short-term period and then sold them at a good profit. As with consumer goods, such as motor cars and washing machines, it was possible to buy stocks and shares on credit. This was called buying on the "margin" and enabled "speculators" to sell off shares at a profit before paying what they owed. In this way it was possible to make a considerable amount of money without a great deal of investment. During the first week of December, 1927, "more shares of stock had changed hands than in any previous week in the whole history of the New York Stock Exchange." (32)
The share price of Montgomery Ward, the mail-order company, went from $132 on 3rd March, 1928, to $466 on 3rd September, 1928. Whereas Union Carbide & Carbon for the same period went from $145 to $413; American Telephone & Telegraph from $77 to $181; Westinghouse Electric Corporation from $91 to $313 and Anaconda Copper from $54 to $162. (33)
John J. Raskob, a senior executive at General Motors, published an article, Everybody Ought to be Rich in August, 1929, where he pointed out: "The common stocks of their country have in the past ten years increased enormously in value because the business of the country has increased. Ten dollars invested ten years ago in the common stock of General Motors would now be worth more than a million and a half dollars. And General Motors is only one of may first-class industrial corporations." He then went on to say: "If a man saves $15 a week, and invests in good common stocks, and allows the dividends and rights to accumulate, at the end of twenty years he will have at least $80,000 and an income from investments of around $400 a month. He will be rich. And because income can do that, I am firm in my belief that anyone not only can be rich, but ought to be rich." (34)
Cecil Roberts, a British journalist working in the United States, pointed out that the stock market hysteria reached its apex in the summer of 1929. "Everyone gave you tips for a rise. Everyone was playing the market. Stocks soared dizzily. I found it hard not to be engulfed. I had invested my American earnings in good stocks. Should I sell for a profit? Everyone said, 'Hang on - it's a rising market'. On my last day in New York I went down to the barber. As he removed the sheet he said softly, 'Buy Standard Gas. I've doubled. It's good for another double.' As I walked upstairs, I reflected that if the hysteria had reached the barber-level, something must soon happen." (35)
It was vitally important that people remained confident in the state of the American economy. Irving Fisher, professor of political economy at Yale University, was considered the most important economist of the 1920s. His research on the quantity theory of money inaugurated the school of macroeconomic thought known as monetarism. On 17th October, 1929 he was reported as telling the Purchasing Agents Association that stock prices had reached "what looks like a permanently high plateau". He added that he expected to see the stock market, within a few months, "a good deal higher than it is today." (36)
Despite Fisher's prediction, on 24th October, over 12,894,650 shares were sold. Prices fell dramatically as sellers tried to find people willing to buy their shares. That evening, five of the country's bankers, led by Charles Edward Mitchell, chairman of the National City Bank, issued a statement saying that due to the heavy selling of shares, many were now under-priced. This statement failed to halt the reduction in demand for shares. (37)
The New York Times reported: "The most disastrous decline in the biggest and broadest stock market of history rocked the financial district yesterday.... It carried down with it speculators, big and little, in every part of the country, wiping out thousands of accounts. It is probable that if the stockholders of the country's foremost corporations had not been calmed by the attitude of leading bankers and the subsequent rally, the business of the country would have been seriously affected. Doubtless business will feel the effects of the drastic stock shake-out, and this is expected to hit the luxuries most severely." (38)
On the opening of the Wall Street Stock Exchange on 29th October, 1929, John D. Rockefeller, the American oil industry business magnate and successful industrialist, issued a statement which attempted to regain confidence in the state of the economy: "Believing that fundamental conditions of the country are sound and that there is nothing in the business situation to warrant the destruction of values that has taken place on the exchanges during the past week, my son and I have for some days been purchasing sound common stocks." (39)
This did not have the desired impact on the market for that day over 16 million shares were sold. The market had lost 47 per cent of its value in twenty-six days. "Efforts to estimate yesterday's market losses in dollars are futile because of the vast number of securities quoted over the counter and on out-of-town exchanges on which no calculations are possible. However, it was estimated that 880 issues, on the New York Stock Exchange, lost between $8,000,000,000 and $9,000,000,000 yesterday. Added to that loss is to be reckoned the depreciation on issues on the Curb Market, in the over the counter market and on other exchanges." (40)
Although less than one per cent of the American people actually possessed stocks and shares, the Wall Street Crash was to have a tremendous impact on the whole population. The fall in share prices made it difficult for entrepreneurs to raise the money needed to run their companies. Frederick Lewis Allen pointed out: "Billions of dollars' of profits - and paper profits - had disappeared. The grocer, the window-cleaner, and the seamstress had lost their capital. In every town there were families which had suddenly dropped from showy affluence into debt. Investors who had dreamed of retiring to live on their fortunes now found themselves back once more at the very beginning of the long road to riches. Day by day the newspapers printed the grim reports of suicides." (41)
Within a short time, 100,000 American companies were forced to close and consequently many workers became unemployed. As there was no national system of unemployment benefit, the purchasing power of the American people fell dramatically. This in turn led to even more unemployment. Yip Harburg pointed out that before the Wall Street Crash, the American citizen thought: "We were the prosperous nation, and nothing could stop us now.... There was a feeling of continuity. If you made it, it was there forever. Suddenly the big dream exploded. The impact was unbelievable." (42)
In 1929 only 1.5 million people in the United States were out of work; by 1931 it had reached 8 million. The Great Depression had began. In many areas the situation was even worse than these figures imply. In industrial cities like Chicago, for example, over 40% of the work-force was unemployed. Edmund Wilson observed: "There is not a garbage-dump in Chicago which is not diligently haunted by the hungry. Last summer the hot weather when the smell was sickening and the flies were thick, there were a hundred people a day coming to one of the dumps... a widow who used to do housework and laundry, but now had no work at all, fed herself and her fourteen-year-old son on garbage. Before she picked up the meat, she would always take off her glasses so that she couldn't see the maggots." (43)
The economic decline in the United States had a major impact on investments in Europe. In January 1930 unemployment in Britain reached 1,533,000 (12.4%). By March, the figure was 1,731,000 (13.7%). Oswald Mosley proposed a programme that he believed would help deal with the growing problem of unemployment in Britain. Mosley argued that unemployment could be radically reduced by a £200m public-works programme on the lines advocated by the John Maynard Keynes and the Trade Union Congress. However, the Chancellor of the Exchequer, Philip Snowden, who was a strong believer in laissez-faire economics, dismissed the proposals. (44)
In June, 1930, unemployment in Britain reached 1,946,000 (15.4%) and by the end of the year it reached a staggering 2,725,000 (19.9%). Ramsay MacDonald responded to the crisis by asking John Maynard Keynes to become a chairman of the Economic Advisory Council to "advise His Majesty's Government in economic matters". Members of the committee included J. A. Hobson, Walter Citrine, Hubert Henderson, Hugh Macmillan, Walter Layton, William Weir and Andrew Rae Duncan. However, Keynes was disappointed by MacDonald's reaction to his advice: "Politicians rarely look to economists to tell them what to do: mainly to give them arguments for doing things they want to do, or for not doing things they don't want to do." (45)
George Douglas Cole, also a member of the Economic Advisory Council, later recalled: "Philip Snowden held a strong position in the Party as its one recognised financial expert... MacDonald nor most of the other members of the Cabinet had any understanding of finance, or even thought they had... The Economic Advisory Council, of which I was a member, discussed the situation again and again; and some of us, including Keynes, tried to get MacDonald to understand the sheer necessity of adopting some definite policy for stopping the rot. Snowden was inflexible; and MacDonald could not make up his mind, with the consequence that Great Britain drifted steadily towards a disaster." (46)
Keynes published A Treatise on Money on 24th October 1930. It was the product of a long intellectual struggle to escape from the ideas in which he had been reared, later dubbed "classical economics"; for example, the Ricardian view that supply creates its own demand. "The focus of the book was on money and prices rather than on output and employment: it contained a full study of the operation of the monetary system, national and international. Fluctuations in prices were no longer explained in terms of changes in the stock of money as in the quantity theory, but in terms of the pressure of demand on the available supply of resources; and the pressure of demand was represented as varying with the magnitude of any divergence between the volume of investment and the availability of savings to finance it." (47)
The traditional view was that unemployment would force down wages and eventually people would be able to sell their services for less and would be "priced into a job". Keynes rejected the view that this "equilibrating mechanism" always worked in this way and sometimes wages are not always "responsive to unemployment". In fact, since the slowdown in the economy began in 1924 wages in Britain had not declined. In one lecture he pointed out that wage rates were fixed by "social and historical forces", not by the "marginal productivity of labour". (48)
Keynes made this point in more detail in more detail in a BBC radio interview: "The existence of the dole undoubtedly diminishes the pressure on the individual man to accept a rate of wages or a kind of employment which is not just what he wants or what he is used to. In the old days the pressure on the unemployed was to get back somehow or other into employment, and if that was so to-day surely it would have more effect on the prevailing rate of wages... I cannot help feeling that we must partly attribute to the dole the extraordinary fact.... that, in, spite of the fall in prices, and the fall in the cost of living, and the heavy unemployment, wages have practically not fallen at all since 1924." (49)
Nicholas Kaldor has pointed out that Keynes criticised the employers for reducing wages and the Bank of England for "imposing high interest rates in an attempt to limit overseas lending to the amount that the level of net exports". By examining "exports, the trade balance, the flow of overseas lending, the nature of the adjustment mechanism in foreign trade, the instruments employed by the Bank of England" he was able to show the system was generating "a low employment trap". (50)
In July, 1931, the George May Committee produced (the two trade unionists refused to sign the document) its report that presented a picture of Great Britain on the verge of financial disaster. It proposed cutting £96,000,000 off the national expenditure. Of this total £66,500,000 was to be saved by cutting unemployment benefits by 20 per cent and imposing a means test on applicants for transitional benefit. Another £13,000,000 was to be saved by cutting teachers' salaries and grants in aid of them, another £3,500,000 by cutting service and police pay, another £8,000,000 by reducing public works expenditure for the maintenance of employment. "Apart from the direct effects of these proposed cuts, they would of course have given the signal for a general campaign to reduce wages; and this was doubtless a part of the Committee's intention." (51)
The five rich men on the committee recommended, not surprisingly, that only £24 million of this deficit should be met by increased taxation. As David W. Howell has pointed out: "A committee majority of actuaries, accountants, and bankers produced a report urging drastic economies; Latham and Pugh wrote a minority report that largely reflected the thinking of the TUC and its research department. Although they accepted the majority's contentious estimate of the budget deficit as £120 million and endorsed some economies, they considered the underlying economic difficulties not to be the result of excessive public expenditure, but of post-war deflation, the return to the gold standard, and the fall in world prices. An equitable solution should include taxation of holders of fixed-interest securities who had benefited from the fall in prices." (52)
William Ashworth, the author of An Economic History of England 1870-1939 (1960) has argued: "The report presented an overdrawn picture of the existing financial position; its diagnosis of the causes underlying it was inaccurate; and many of its proposals (including the biggest of them) were not only harsh but were likely to make the economic situation worse, not better." (53) Keynes reacted with great anger as it was the complete opposite of what he had been telling the government to do and called the May Report "the most foolish document I ever had the misfortune to read". (54)
At another meeting on 23rd August, 1931, nine members (Arthur Henderson, George Lansbury, John R. Clynes, William Graham, Albert Alexander, Arthur Greenwood, Tom Johnson, William Adamson and Christopher Addison) of the Cabinet stated that they would resign rather than accept the unemployment cuts. A. J. P. Taylor has argued: "The other eleven were presumably ready to go along with MacDonald. Six of these had a middle-class or upper-class background; of the minority only one (Addison)... Clearly the government could not go on. Nine members were too many to lose." (55)
Ramsay MacDonald was only able to persuade three other members of the Labour Party to serve in the National Government: Philip Snowden (Chancellor of the Exchequer) Jimmy Thomas (Colonial Secretary) and John Sankey (Lord Chancellor). The Conservatives had four places and the Liberals two: Stanley Baldwin (Lord President), Samuel Hoare (Secretary for India), Neville Chamberlain (Minister of Health), Herbert Samuel (Home Secretary), Lord Reading (Foreign Secretary) and Philip Cunliffe-Lister (President of the Board of Trade).
On 8th September 1931, the National Government's programme of £70 million economy programme was debated in the House of Commons. This included a £13 million cut in unemployment benefit. All those paid by the state, from cabinet ministers and judges down to the armed services and the unemployed, were cut 10 per cent. Teachers, however, were treated as a special case, lost 15 per cent. Tom Johnson, who wound up the debate for the Labour Party, declared that these policies were "not of a National Government but of a Wall Street Government". In the end the Government won by 309 votes to 249. (56)
John Maynard Keynes spoke out against the morality of cutting benefits and public sector pay. He claimed that the plans to reduce the spending on "housing, roads, telephone expansion" was "simply insane". Keynes went on to say the government had been ignoring his advice: "During the last 12 years I have had very little influence, if any, on policy. But in the role of Cassandra, I have had considerable success as a prophet. I declare to you, and I will stake on it any reputation I have, that we have been making in the last few weeks as dreadful errors of policy as deluded statesmen have ever been guilty of." (57)
MacDonald was now a prisoner of the Conservative Party. He opposed the administration of the Means Test to the unemployed but was powerless to object. This represented almost a return to the poor law and when it was enacted it gave rise to considerable working-class opposition. He wrote in his diary that "no vision of general situation and only concern to keep government out of practically everything... deserted by Labour and Liberal parties, the National Government inevitably tends to fundamental Toryism." (58)
Sweden and the Great Depression
After the Wall Street Crash the whole of Western Europe was impacted by the Great Depression. This was true of Sweden and by 1931, industrial production had declined by 10.3%. The economist, Ernst Wigforss, who was a convert to the ideas of John Maynard Keynes, argued: "We socialists cannot accept a system... where up to 10% of the workers must be unemployed, and during worse times, even more. We refuse to admit that this is necessary and natural, despite how much people come armed with theories stating that this must be so." (59)
In the 1932 General Election, the Social Democratic Party won 41.7% of the seats. The minor left-wing parties, including the Independent Socialist Party (5.3%) Communist Party (3.0%) agreed to form a minority government with the SDP leader, Per Albin Hansson, as prime minister. Although they did not join the government the Farmers' League agreed to keep them in power in return for support for their agriculture policy. (60)
Hansson appointed Ernst Wigforss, as his finance minister. After leaving the Gold Standard he devalued the Krona, reducing the price of Swedish exports. Wigforss proposed a public work program designed to put unemployed back to work even if this meant budget deficits. This was a radical departure from the policies of previous governments. A balanced budget had always been the main objective. Usually, government loans were only used for investments that were expected to generate future profits such as postal services, railroads or electric power supply. (61)
The first unbalanced budget proposed by Wigforss for the years 1933 and 1934 was criticized for causing inflation and "depriving businesses of capital necessary for their development". To counter these arguments, the Social Democrats moved away from financing public work programs through deficits and proposed an inheritance tax used to finance their plans. The policies of deficit spending and government intervention in the economy, began the creation of the Swedish Welfare State. Wigforss argued for creating "provisional utopias... tentative sketches of a desirable future... They served as a critique of existing social conditions and as a guide to present action, yet could be revised with future experience." (62)
In June 1936, the uneasy majority enforced Hansson's resignation, leaving League chairman Axel Pehrsson-Bramstorp to form a three-month "Holiday Cabinet" until the elections in September. (63) The 1936 General Election saw a surge in support of the Social Democrats with 45.9% of the vote. Along with the Independent Socialists (4.4) and Communist Party (3.3), Hansson formed the next government. This was a popular government and in 1940 General Election the Social Democrats won an overall majority with 53.8% of the vote. Per Albin Hansson declared: "We Social Democrats do not accept a social order with political, cultural and economic privileges or one where the private-owned means of production are a way for the few to keep the masses of people in dependence." (64)
Franklin D. Roosevelt and the New Deal
In March 1932, Franklin D. Roosevelt asked Raymond Moley, a professor of public law at Columbia University, "to pull together some intellectuals who might help Roosevelt's bid for the presidency". Moley recruited two of his university colleagues, Rexford G. Tugwell and Adolf Berle. Others who joined the group, later known as the Brains Trust, included Roosevelt's law-partner, Basil O'Connor and his main speech writer, Samuel Rosenman. Others who attended these meetings included Felix Frankfurter, Louis Brandeis (who introduced the group to the ideas of John Maynard Keynes) and Benjamin Cohen. (65)
Three days before the 1932 Presidential Election President Herbert Hoover claimed that Roosevelt's policies could be compared to those of Joseph Stalin. He suggested that his opponent had "the same philosophy of government which has poisoned all of Europe... the fumes of the witch's cauldron which boiled in Russia." He accused the Democrats of being "the party of the mob". Hoover then added: "Thank God, we still have a government in Washington that knows how to deal with the mob." (66)
The turnout, almost 40 million, was the largest in American history. Roosevelt received 22,825,016 votes to Hoover's 15,758,397. With a 472-59 margin in the Electoral College, he captured every state south and west of Pennsylvania. Roosevelt carried more counties than a presidential candidate had ever won before, including 282 that had never gone Democratic. Of the forty states in Hoover's victory coalition four years before, the President held but six. Hoover received 6 million fewer votes than he had in 1928. The Democrats gained ninety seats in the House of Representatives to give them a large majority (310-117) and won control of the Senate (60-36). Only one previous Republican candidate, William Howard Taft, had done as badly as Hoover. (67)
all after March 4th." Cliff Berryman, Washington Evening Star (December, 1932)
Franklin D. Roosevelt was elected on 8th November, 1932, but the inauguration was not until 4th March, 1933. While he waited to take power, the economic situation became worse. Three years of depression had cut national income in half. Five thousand bank failures had wiped out 9 million savings accounts. By the end of 1932, 15 million workers, one out of every three, had lost their jobs. When the Soviet Union's trade office in New York issued a call for 6,000 skilled workers to go to Russia, more than 100,000 applied. (68)
Several members of Roosevelt's Brains Trust were supporters of the ideas of John Maynard Keynes. For example, Rexford G. Tugwell and Adolf Berle argued the free market of Adam Smith had vanished forever. They concluded that the market no longer performed its classic function of maintaining an equilibrium between supply and that the two thousand men who controlled American economic life, manipulated prices and production. Tugwell wrote: "The cat is out of the bag. There is no invisible hand. There never was... We must now supply a real and visible guiding hand to do the task which that mythical, nonexistent, invisible agency was supposed to perform, but never did." (69)
After he was elected President Roosevelt initially opposed massive public works spending. However, by the spring of 1933, the needs of more than fifteen million unemployed had overwhelmed the resources of local governments. In some areas, as many as 90 per cent of the people were on relief and it was clear something needed to be done. His close advisors and colleagues, Harry Hopkins, Robert LaFollette Jr. Robert Wagner, Fiorello LaGuardia, George Norris and Edward Costigan eventually won him over to the ideas of Keynes. (70)
Frances Perkins explained in her book, The Roosevelt I Knew (1946): In one of my conversations with the President in March 1933, he brought up the idea that became the Civilian Conservation Corps. "Roosevelt loved trees and hated to see them cut and not replaced. It was natural for him to wish to put large numbers of the unemployed to repairing such devastation. His enthusiasm for this project, which was really all his own, led him to some exaggeration of what could be accomplished. He saw it big. He thought any man or boy would rejoice to leave the city and work in the woods. It was characteristic of him that he conceived the project, boldly rushed it through, and happily left it to others to worry about the details." (71)
On 21st March, 1933, sent an unemployment relief message to Congress. It took only eight days to create the Civilian Conservation Corps. It authorized half a billion dollars in direct federal grants to the states for relief. The CCC was a program designed to tackle the problem of unemployed young men aged between 18 and 25 years old. By September, 1935, over five hundred thousand young men lived in CCC camps. (72)
The organisation was based on the armed forces with officers in charge of the men. Over 25,000 men were First World War veterans. The pay was $30 dollars a month with $22 dollars of it being sent home to dependents. The men planted three billion trees, built public parks, drained swamps to fight malaria, built a million miles of roads and forest trails, restocked rivers with nearly a billion fish, worked on flood control projects and a range of other work that helped to conserve the environment. Between 1933 and 1941 over 3,000,000 men served in the CCC. (73)
Roosevelt also established the National Recovery Administration (NRA) and Public Works Administration (PWA). The Works Projects Administration (WPA) was established in 1935 as part of the New Deal in an attempt to combat the Depression. This included the Federal Writers Project, Federal Theatre Project, and the Federal Art Project.
At the beginning of 1933 unemployment stood at 13 million (12.8%). By 1936 unemployment had fallen to 9.0%. The Republican Party selected Alfred M. Landon as its candidate. Herbert Hoover campaigned for Landon. He told the New York Times: "I rejected the schemes of economic planning to regiment and coerce the farmer. That was born of a Roman despot 1400 years ago and grew into the AAA. I refused national plans to put government into business in competition with its citizens. That was born of Karl Marx. I vetoed the idea of recovery through stupendous spending to prime the pump. That was born of a British Professor, John Maynard Keynes." (74)
After the 1933 General Election, Chancellor Adolf Hitler proposed an Enabling Bill that would give him dictatorial powers. Such an act needed three-quarters of the members of the Reichstag to vote in its favour. All the active members of the Communist Party, were in prison, in hiding, or had left the country (an estimated 60,000 people left Germany during the first few weeks after the election). This was also true of most of the leaders of the other left-wing party, Social Democrat Party (SDP). However, Hitler still needed the support of the Catholic Centre Party (BVP) to pass this legislation. Hitler therefore offered the BVP a deal: vote for the bill and the Nazi government would guarantee the rights of the Catholic Church. The BVP agreed and when the vote was taken on 24th March, 1933, only 94 members of the SDP voted against the Enabling Bill. (75)
Soon afterwards the Communist Party and the Social Democrat Party became banned organisations. Party activists still in the country were arrested. A month later Hitler announced that the Catholic Centre Party, the Nationalist Party and all other political parties other than the NSDAP were illegal, and by the end of 1933 over 150,000 political prisoners were in concentration camps. Hitler was aware that people have a great fear of the unknown, and if prisoners were released, they were warned that if they told anyone of their experiences they would be sent back to the camp. (76)
It was not only left-wing politicians and trade union activists who were sent to concentration camps. The Gestapo also began arresting beggars, prostitutes, homosexuals, alcoholics and anyone who was incapable of working. Although some inmates were tortured, the only people killed during this period were prisoners who tried to escape and those classed as "incurably insane". (77)
Hitler proclaimed May Day, 1933, as a national holiday and arranged to celebrate it as it had never been celebrated before. Trade union leaders were flown to Berlin from all parts of Germany. Joseph Goebbels staged the greatest mass demonstration Germany had ever seen. Hitler told the workers' delegates: "You will see how untrue and unjust is the statement that the revolution is directed against the German workers." Later that day Hitler told a meeting of more than 100,000 workers that "re-establishing social peace in the world of labour" would soon begin. (78)
The next day, Hitler ordered the Sturm Abteilung (SA) to destroy the trade union movement. Their headquarters throughout the country were occupied, union funds confiscated, the unions dissolved and the leaders arrested. Large numbers were sent to concentration camps. Within a few days 169 different trade unions were under Nazi control. (79)
Hitler now established what became known as the Corporate State. For example, Hitler decreed a law bringing an end to collective bargaining and providing that henceforth "labour trustees", appointed by him, would "regulate labour contracts" and maintain "labour peace". Since the decisions of the trustees were to be legally binding, the law, in effect, outlawed strikes. Robert Ley, the head of the German Labour Front promised "to restore absolute leadership to the natural leader of a factory - that is, the employer... Only the employer can decide." (80)
The German Labour Front was the only union organization allowed in the Third Reich and had over 20 million members. Ley appointed twelve state officials whose job it was to regulate wages, conditions of work and labour contracts in each of their respective districts, and to maintain peace between workers and employers. (81) The DAF was "rendered totally docile and workers no longer had any voice in management". (82)
Soon after Hitler gained power he ordered the Reichstag to pass legislation that would reduce male unemployment. Young couples intending to get married could apply in advance for the interest-free loan of up to 1,000 Reichsmarks provided that the prospective wife had been in employment for at least six months in the two years up to the passing of the law. Importantly, she had to give up her job by the time of the wedding and undertake not to enter the labour market again until the loan was paid off, unless her husband lost his job in the meantime. To stimulate production the loans were issued not in cash but in the form of vouchers for furniture and household equipment. (83)
As Richard Evans, the author of The Third Reich in Power (2005), has pointed out: "That this was not a short-term measure was indicated the terms of repayment, which amounted to 1 per cent of the capital per month, so that the maximum period of the loan could be as much as eight and a half years... However, the loans were made more attractive, and given an additional slant, by a supplementary decree issued on 20 June 1933 reducing the amount to be repaid by a quarter for each child born to the couple in question. With four children, therefore, couples would not have to repay anything." (84)
In 1933 Germany had an unemployment rate of 26.3% (5,400,000). It was the main reason for the growth in support for the Nazi Party. Hitler instituted an emergency work programme for reforestation, land reclamation, dam building, motorway, etc., giving short-term heavy labour work. They made a year of work service compulsory for registered unemployed from 1935, and by introducing compulsory military service the same year achieved further reductions in the numbers. Unemployment fell at the following rate: 1934: 14.9% (3,700,000); 1935: 11.6 (2,900,000); 1936: 8.3% (2,500.000); 1937: 4.6% (1,800,000). This compared to an unemployment rate in 1937 of 10.8% in Britain. (85)
In 1945 Britain elected a Labour government who promised they would create a society based on the economic ideas of John Maynard Keynes. This included the nationalization of the coal industry, Bank of England, British Electricity Authority, Cable & Wireless, Railways, water transport, some road haulage, some road passenger transport, Thomas Cook & Son, Gas industry and finally, after twice being rejected by the House of Lords, in 1951 the Iron and Steel Act. (86)
Hugh Dalton, the Chancellor of the Exchequer, also took note of Keynes's ideas on defence spending. In 1946 defence spending was nearly 18 per cent of gross national product. At the same time there was a manpower shortage in vital industries, with 18.6 per cent of the British male population still in the services. Keynes had pointed out that Britain had "got into the habit" of maintaining large and expensive military establishments all over the Mediterranean, Africa and Asia. The commitment to "police vast areas eastwards from Tunis to Burma and northwards from East Africa to Germany" could cripple the country. (87)
John Simkin (9th August, 2019)