Their Great Depression and Ours : Part I (extrait)

Par James Livingston, History News Network, 7 octobre 2008

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The “underlying cause” of the Great Depression was not a short-term credit contraction engineered by central bankers who, unlike Ferguson and Bernanke, hadn't yet had the privilege of reading Milton Friedman's big book. The underlying cause of that economic disaster was a fundamental shift of income shares away from wages/consumption to corporate profits that produced a tidal wave of surplus capital that could not be profitably invested in goods production-and, in fact, was not invested in good production.. In terms of classical, neoclassical, and supply-side theory this shift of income shares should have produced more investment and more jobs, but it didn't. Why not ?

Look first at the new trends of the 1920s. This was the first decade in which the new consumer durables-autos, radios, refrigerators, etc.-became the driving force of economic growth as such. This was the first decade in which a measurable decline of net investment coincided with spectacular increases in nonfarm labor productivity and industrial output (roughly 60% for both). This was the first decade in which a relative decline of trade unions gave capital the leverage it needed to enlarge its share of revenue and national income at the expense of labor.

These three trends were the key ingredients in a recipe for disaster. At the very moment that higher private-sector wages and thus increased consumer expenditures became the only available means to enforce the new pattern of economic growth, income shares shifted decisively away from wages, toward profits. At the very moment that net investment became unnecessary to enforce increased productivity and output, income shares shifted decisively away from wages, toward profits.

What could be done with the resulting surpluses piling up in corporate coffers ? If you can increase labor productivity and industrial output without making net additions to the capital stock, what do you do with your rising profits ? In other words, if you can't invest those profits in goods production, where do you place them in the hope of a reasonable return ?

The answer is simple-you place your growing surpluses in the most promising markets, in securities listed on the stock exchange, say, or in the Florida real estate boom, particularly in view of receding returns elsewhere. You also establish time deposits in commercial banks and start issuing paper in the call loan market that feeds speculative trading in securities.

At any rate that is what corporate CEOs outside the financial sector did between 1926 and 1929. They had no place else to put their increased profits-they could not, and they did not, invest these profits in expanded productive capacity, because merely maintaining and replacing the existing capital stock was enough to enlarge capacity, productivity, and output.

No wonder the stock market boomed, or rather no wonder a speculative bubble developed there. It was the single most important receptacle of the surplus capital generated by a decisive shift of income shares away from wages, toward profits-and that surplus enforced rising demand for new issues of securities even after 1926, when, according to Moody's Investors Service, almost 80 percent of the proceeds from such IPOs were spent unproductively (that is, they were not used to invest in plant and equipment or to hire labor).

The stock market crashed in October 1929 because the non-financial firms abruptly pulled their $7 billion out of the call loan market. They had experienced the relative decline in demand for consumer durables, particularly autos, since 1926, and knew better than the banks that the outer limit of consumer demand had already been reached. Demand for stocks, whether new issues or old, disappeared accordingly, and the banks were left holding the proverbial bag-the bag full of “distressed assets” called securities listed on the stock exchange. That is why they failed so spectacularly in the early 1930s-again, not because of a “credit contraction” engineered by a clueless Fed, but because the assets they were banking on and loaning against were suddenly worthless.

The financial shock of the Crash froze credit, including the novel instrument of installment credit for consumers, and thus amplified the income effects of the shift to profits that dominated the 1920s. Consumer durables, the new driving force of economic growth as such, suffered most in the first four years after the Crash. By 1932, demand for and output of automobiles was half of the levels of 1929 ; industrial output and national income were similarly halved, while unemployment reached almost 20 percent.

And yet recovery was on the way, even though increased capital investment was not-even though by 1932 non-financial corporations could borrow from Herbert Hoover's Reconstruction Finance Corporation at almost interest-free rates. By 1937, industrial output and national income had regained the levels of 1929, and the volume of new auto sales exceeded that of 1929. Meanwhile, however, net investment out of profits continued to decline, so that by 1939, the capital stock per worker was lower than in 1929.

How did this unprecedented recovery happen ? In terms of classical, neoclassical, and supply-side theory, it couldn't have happened-in these terms, investment out of profits must lead the way to growth by creating new jobs, thus increasing consumer expenditures and causing their feedback effects on profits and future investment. But as H. W. Arndt explained long ago, “Whereas in the past cyclical recoveries had generally been initiated by a rising demand for capital goods in response to renewed business confidence and new investment opportunities, and had only consequentially led to increased consumers' income and demand for consumption goods, the recovery of 1933-7 seems to have been based and fed on rising demand for consumers' goods.”

That rising demand was a result of net contributions to consumers' expenditures out of federal deficits, and of new collective bargaining agreements, not the eradication of unemployment. In this sense, the shift of income shares away from profits, toward wages, which permitted recovery was determined by government spending and enforced by labor movements.

So the “underlying cause” of the Great Depression was a distribution of income that, on the one hand, choked off growth in consumer durables-the industries that were the new sources of economic growth as such-and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s. By the same token, recovery from this economic disaster registered, and caused, a momentous structural change by making demand for consumer durables the leading edge of growth.

Mr. Livingston teaches history at Rutgers. He's finished a book called The World Turned Inside Out : American Thought and Culture at the End of the 20th Century (Rowman & Littlefiel, 2009). He blogs at politicsandletters.com.

maintenant souvenez-vous de ce qui se passe chez nous depuis vingts ans ?

de moins en moins de grèves (quoi que veulent nous faire croire certains journeaux bourgeois!) 

des syndicats de moins en moins combatifs et sans forces

10% de PIB en moins pour les salaires directs et indirects 10% en plus pour les profits

etc, etc, tout le scénario.