The feature below was written in early 2009, one of the International Communist Forum presentations and pamphlets, sponsored by Workers Fight, a British Marxist group. Although now almost four years old, it still provides an excellent analysis of past and present attempts to ‘regulate’ capitalism to prevent crisis. As the feature notes, crisis is an integral part of the capitalist mode of production; it can’t be regulated away. Neither the ‘free market’ nor a more regulatory system can prevent crises recurring. At the same time, we don’t necessarily agree with everything in the piece – for instance, the notion that the global financial crisis might be the worst economic crisis in human history!
It is now 20 months since the present crisis began, in August 2007. For a long time governments denied its existence. When it became impossible to conceal the damage it was causing, they finally acknowledged its reality. What is more, they admitted that far from coming out of the blue, it had been brewing for years.
By now, a growing number of experts have come to the realisation that this crisis may well turn out to be the worst that humanity has ever experienced, worse even than the devastation of the Great Depression, in the 1930s. Of course, it would take more than that to stop Gordon Brown’s Chancellor, Alistair Darling, from massaging his figures and predicting in his budget that the economy will start to grow again next year. Not to mention the Confederation of British Industry, which keeps seeing “green shoots of recovery” in its crystal ball. But the truth is that, due to the chaotic nature of the capitalist market, no-one can tell for sure what will happen next month, let alone next year, or after. The fact that within just 6 months, the IMF was forced to double its estimate of bank losses upwards, to $US4,000 billion, shows the extent to which the world’s governments remain blind in their dealings with this capitalist crisis.
Nevertheless, these governments had been boasting endlessly about their “pro-active” measures against the crisis and how bold, innovative and efficient they were. The mind-boggling sums they splashed out on the financial system have certainly helped a section of capitalists to line their pockets and make up for some of their losses. These bailouts may have protected the financial system from total collapse. But to what extent and for how long, no-one can be sure, not even the governments and their army of experts themselves. In fact, from this point of view, the effectiveness of these measures is anybody’s guess.
But whatever these measures do, they are certainly not designed to protect the working class majority against the social devastation of the crisis, as the brutal rise in unemployment across the world shows. In fact, by doing nothing to create new jobs and failing to attach the necessary strings to their bailouts, the governments are merely underwriting the bosses’ drive to make workers pay for the crisis by cutting their jobs and wages. But then, making workers foot the bill for their bailout of the system is also the objective of governments themselves. In the case of Britain, higher indirect taxes have already been imposed and there are planned job cuts in public services , which will not only swell the ranks of the jobless, but also result in reduced services for the working class as a whole.
In this respect, there is a striking similarity in the policies implemented by the various governments across the world. It does not matter whether they claim to be Socialists as in Spain or Norway, whether they are “Labour” as in Britain and Australia, or outspoken right-wing reactionaries as in Italy and France – or indeed newly-elected populist demagogues, like Obama. The rich countries’ ruling politicians all use the same language of deception. They claim to be “saving” working people from disaster, while overseeing and, in fact assisting, their slide into unemployment and poverty.
In fact, this is nothing new. History shows that when it comes to dealing with the recurring crises of the system, the governments of the capitalist class always turn to the same policies, regardless of their political stripe. Already in normal times, the state is considered by the capitalists as their milch cow. But when a crisis breaks out, all its resources must be mobilised by the politicians in office to divert every penny available towards the capitalists’ coffers, in order to maintain their profits – and this, regardless of the exorbitant cost to the rest of the population. It is in such circumstances that the state exposes in the most naked fashion what it really is – the instrument of the dictatorship of a tiny minority of parasitic profiteers over the whole of society.
At the same time, the experts of capital and their politicians strive to deceive the working class, as they have started to do lately, by talking about the radical measures they intend to take in order to ensure that such a catastrophe never happens again in the future. But, as we are going to see now, through a few examples, whenever this has been the case in the past, the so-called “regulations” which came out of all this hot air have failed to prevent the return of the next crisis – not because there was anything wrong with the measures themselves, nor even because of the incompetence of the politicians in office, but primarily because there is no way the drunken ship of capitalism can be steered clear of its chronic crises.
The 1930s: from Hoover’s “voluntary” bank bailout. . .
For all of Brown’s boasting, there is nothing particularly new, bold nor innovative in the methods used in today’s bailout of capitalist finance. In the somersaults that followed the stock market crash of 1929, the governments of the rich countries resorted to exactly the same methods, and often much more radical ones. And yet, as we know now, the bailouts of the time did nothing to bring the capitalist economy under control. It took the massive destruction of World War II to finally clear the rubble left from the Great Depression, allowing the world market to start afresh.
In the US, the stock market crash generated a huge amount of valueless paper – mainly shares which had collapsed in the crash, bonds in speculative funds and unrecoverable loans to bankrupt speculators. Most of these “toxic assets”, as they would be called today, were held by banks on behalf of their customers, both individuals and businesses. Given the huge number of small banks across the country, many just collapsed under the sheer weight of their losses. But many more went to the wall as a result of a long series of local panics which dried up all their reserves. In 1930 alone, 1,350 banks had to close down, followed by another 2,293 in 1931.
At first, the Hoover administration tried methods which had worked well in the past – by getting the big banks to bail out the smaller ones. For an administration which had close ties with the upper crust of the banking industry, this was considered an effective strategy for two reasons: first it did not appear to cost anything to the taxpayer (which was, in fact, an illusion as the big banks had access to the state reserve banks) and, second, it allowed the big sharks to swallow the smaller fishes, thereby rewarding them with new sources of profits once the crisis was over. Except that, this time, the big banks which had also suffered large losses in the stock market crash refused.
As a result of this failure, an alternative strategy was put in place in 1931, in the form of a state-sponsored National Credit Corporation whose task was to provide support to shaky credit businesses. Although it was a government initiative, this institution was designed to be a self-help organisation for the banking industry as a whole, managed by representatives of this industry and funded jointly by all the banks through a system of voluntary contributions. Except that, once again, the said voluntary contributions proved elusive. The National Credit Corporation only managed to collect 27% of its target starting capital and this second attempt collapsed.
In the end, having failed to secure any help from the bankers themselves, Hoover resigned himself to setting up a state-run body, entirely financed by the government’s budget, which was to be called the Reconstruction Finance Corporation. Launched in January 1932, this new institution granted credit worth $US1.2 bn of taxpayers’ money to troubled banks – although most of this money went to the bigger banks rather than the most fragile. It seems, however, that this direct incursion of the state into banking – something which was unprecedented in the US – was relatively successful in calming the depositors’ fears since, over the year 1932, the volume of bank withdrawals dropped by 60% and the number of banks going bust fell to 1,453 – although this was still a very large number by any measure.
But even that relative improvement proved short-lived. The banking crisis, which had developed across the rich countries in the meantime, was now feeding back into the US. Many US banks found themselves left with large quantities of unrecoverable loans to bankrupt European and South American banks. By the end of 1932, the flow of customers demanding to recover their deposits or to convert their money into gold began to grow again, forcing many state governors to declare compulsory bank holidays in an attempt to stop savers’ panics. This time the panic wave threatened to engulf the entire US banking system, something that the Reconstruction Finance Corporation was totally unable to cope with.
. . . To Roosevelt’s and Germany’s near-nationalisation
In the meantime the Democrat Roosevelt had been elected president following a populist campaign full of promises to break from the perceived benevolence of the Hoover administration towards big business, to bring the crisis under control and to uphold the interests of the man in the street. After his inauguration, on 4 March 1933, in the middle of a rapidly growing wave of panic, Roosevelt’s first move was to rush through Congress an Emergency Banking Relief Act. This Act gave the government the powers to requisition and buy back most of the gold held privately, thereby depriving savers of the option to withdraw their deposits in order to buy gold . But above all, it provided Roosevelt with the powers to declare a compulsory 4-day national banking holiday across the USA and to have federal inspectors investigate the accounts of all 17,300 banks across the country. The shutdown was immediately effective. Within four days, 12,000 banks were allowed to re-open while the others were undergoing further investigations. In the end, over 2,000 banks were ordered to go into liquidation, thereby ridding the banking industry of its weakest elements. By the same token, the clean bill of health given by the federal authorities to the banks allowed to re-open was enough to contain the panic wave.
Another provision of the Emergency Banking Relief Act was to allow the Reconstruction Finance Corporation to help strengthening the banks’ capital base by buying shares in selected banks. At first bankers were extremely hostile to the idea of allowing the government to put its finger in their pie. But then, as their losses kept increasing, they soon found that they had no option other than to comply. So much so that a year later, the Reconstruction Finance Corporation owned 31% of the shares of the country’s 100 largest banks.
However, although far more drastic in form than anything we have seen in the present crisis so far, there was nothing “progressive” in this near-nationalisation of the banking system – just as there was nothing “progressive” in Roosevelt’s New Deal, contrary to what is usually said about it. This was a policy which was merely dictated by the requirements of a capitalist class threatened with bankruptcy. Nor was it an American invention either. In fact, it had been preceded by measures, which were similar, although more radical in some ways, implemented in 1932 in Germany, by a right-wing government under the leadership of a monarchist Chancellor.
Of all European countries, Germany was certainly the one which was most severely hit by the banking crisis, in 1931. Unlike Roosevelt, neither those at the head of the regime, nor the bankers, had any particular problem with the state directly organising a bank bailout and even taking over some of the banks. So, not only did the government embark on a large-scale buying spree of shares in the country’s largest banks, through its central bank, but it took this opportunity to engineer a vast restructuring of these banks by organising a series of mergers, which produced Germany’s modern day banking giants. By the end of the year, it was estimated that 70% of the shares of all private banks were in the hands of the German state.
It should be said, however, that neither the American nor the German near-nationalisations were intended to last long. Their primary purpose was to put these banks under the protection of the state, to restore the public’s confidence in these banks by virtue of the state’s guarantee and to inject fresh capital into them at a time when it would have been impossible for them to raise funds from private sources. In both cases, as soon as these objectives were achieved and the future of the state-controlled banks secure, their shares were sold back to private capitalists.
Regulation in the 1930s
In fact, the similarities between the US and Germany go further than that. In both cases, the intervention of the state in the banking crisis produced the first forms ever, of banking regulations in these countries.
In Germany, this was done through a 1934 Act passed after Hitler’s victory, which introduced a system of compulsory registration for all banking institutions, together with regular monthly controls over their accounts and an obligation to declare to the authorities any large loans they made, as well as any loans considered problematic.
In the US, the regulatory system introduced as part of the banks’ bailout was less stringent than in Germany, but more comprehensive. It included the setting up of a compulsory system of insurance for bank deposits, which guaranteed savers’ accounts up to a certain limit. A permanent independent commission, the Securities and Exchange Commission, was formed in order to monitor stock market operators, their trade operations, the companies whose shares were traded and the banks providing credit to stock market operators. Another piece of legislation, known as the 1935 Glass-Steagall Act, extensively transformed the US banking landscape, by banning retail banks from getting involved in investment banking. This meant, for instance, that a bank which took deposits from customers and managed their money on their behalf, could not at the same time issue shares on behalf of companies. Officially, the rationale behind this separation between retail and investment banking was to ensure that retail bankers would provide “unbiased” investment advice to their customers . In reality it certainly had a lot more to do with shielding the financial system from the potential threat of depositors’ panics, while protecting the large cash reserves of the retail banks from the high-risk operations involved in investment banking.
Ironically, the near collapse of Germany’s largest real estate bank, Hypo Real Estate Bank, in 2008, took place under a regulatory system which is almost identical to the stringent system which was introduced in 1934. Yet, when the German government moved to take over the bank earlier in April, it held an estimated £250 billions-worth of unrecoverable loans. It would appear, therefore, that either the checks and balances introduced in 1934, precisely to prevent banks from piling up bad loans, did not work, or else that the warning signals that should have been sent by the normal examination of the bank’s books were concealed or ignored. In any case, the 1934 regulations, no matter how stringent, failed to prevent a repetition of almost exactly the same problems of over-inflated problematic loans.
As to the regulatory system introduced in the US by the Glass-Steagall Act, it was slowly eroded over the years under pressure from the financial lobby, before being finally repealed in most of its provisions under the Clinton administration, in 1998. This has led many commentators to argue that, had the Glass-Steagall Act remained in force, the present crisis would never have occurred.
The problem with this argument, however, is that, actually, by the time it was repealed, this regulatory system had so many loopholes that it could not regulate very much. In fact, the Act had gaping loopholes right from its early days. Thus, JP Morgan, today one of the US largest banks under the JP Morgan-Chase brand, responded to the Glass-Steagall act by splitting its business in two parts – JP Morgan kept the retail business and Morgan-Stanley took the investment business. But the links between the former partners who formed the leading circles of the two banks remained so close that, according to a banking historian, “managerial decision-making (between the two banks) was co-ordinated through joint directives”, thereby defeating the purpose of the Glass-Steagall regulation. Of course, in theory, the US Justice department could have chosen to read the riot act to the two banks. But which administration and which prosecutor would have taken the risk of threatening the billionaire Morgan tribe and its army of lawyers with a court case? And the fact is that none ever did. Besides, is it any wonder if the provisions of the Glass-Steagall Act have been consistently ignored or eroded, knowing that most of the high-flyers occupying the positions which may have had some influence on such a matter – like the Treasury secretary or the chairman of the Federal Reserve Bank -are usually themselves former directors of the very same banks which have every reason to want the provisions of this act ignored?
But this is precisely the nature of regulations under capitalism. In the best of cases, they are introduced in order to resolve circumstantial problems caused to the capitalists themselves by the irrationality of their system, not by addressing the causes of that irrationality – which would require getting rid of the profit system itself – but to allow capitalist profiteering to resume its unhindered parasitic operation at some later stage. US bankers accepted, albeit reluctantly, the Glass-Steagall Act because the economic catastrophe caused by the crisis threatened their profits and because they needed the state to bail them out despite the hostility of US public opinion. But once the crisis was gone, they saw no reason to carry on tolerating constraints to their profiteering. And since under capitalism, the politicians and civil servants who are in charge of enforcing such regulations are at the service of the capitalist class, it was inevitable that these regulations would be increasingly eroded with time and finally repealed altogether.
After WW2, the tail-end of the “Great Depression”
As we know, it took far more than the state-sponsored bailouts and regulatory measures already described to clear the debris of the “Great Depression”. In fact, it took the colossal devastation of World War II (and the resulting terrible bloodshed) for the capitalist system to be able to resume its operations from a relatively “clean” sheet – but even then, the states of the rich countries had to give big business a head start.
In a way, the war completed the cleanup of the “Great Depression”, by destroying a large part of the past outdated productive capacity. But it did not replace the destroyed industrial fabric with a new, viable one. In Japan and a large part of continental Europe, whole sectors of the economy needed to be rebuilt virtually from scratch, including vital transport and energy infrastructure, not to mention social infrastructure like housing, hospitals, etc. Even in the countries which, like Britain, had suffered far less from wartime destruction, the economy that came out of the war was inadequate to meet peacetime needs, both because it was antiquated and because its wartime organisation had completely disrupted its operation. The only exception to this rule among the rich countries, was the USA, which had been far less disorganised by the war effort, due to its large domestic market and enormous industrial machinery.
If each country’s domestic economy was in a bad shape, the world market was, in most respects, in an even worse state. The normal operation of the world market had been suspended by the war. Wartime trade had been carried out only in the form of barter or long-term loans. The national currencies of the rich countries had no value outside the boundaries of their respective colonial sphere or zone of influence and, any way, to all intents and purposes, the economies which were supposed to guarantee the value of these currencies were more or less bust.
The question was: who was going finally to clear this mess, rebuild what needed to be rebuilt and restore some sort of normality in the world economy? Not the capitalist classes, in any case. Despite the enormous profits many capitalists had made out of the war, they were determined not to forfeit short term profits by committing themselves to the long-term investment required by economic reconstruction.
The postwar situation had, therefore, all the characteristics of an economic crisis – a crisis without a crash, in which some substitute had to be found for the incapacity (or rather the refusal) of the capitalist classes to repair the damage they had caused to their own system. To that extent, it was the tail-end of the “Great Depression”, which was finally sorted out by the intervention of the rich countries’ states – and therefore, as is always the case under capitalism, at the expense of the vast majority of the world population.
On a national level, this intervention took the form of massive injections of public funds into the economy. In most of Europe, heavy industries, energy and transport were taken over by the states, as well as, in many cases (although not in Britain) banking and insurance. Contrary to lingering illusions, these nationalisations were not carried out against the will of the capitalist classes. Shareholders were awarded over-generous compensation, which allowed them to target this fresh cash at ventures which could be immediately profitable. Meanwhile, the states’ massive investment in nationalised industries provided the cheap energy and industrial infrastructure without which the emergence of new private industries would have been impossible. Likewise, the setting up of comprehensive welfare systems in many countries was not the result of some sort of general “progressive” orientation on the part of the governments of the time, but the expression of a consensus among the capitalist classes, which saw social welfare as a means to reduce their wage costs.
Of course, this consensus was also undoubtedly underpinned by the widespread fear that a revolutionary backlash might threaten the capitalist order, as had been the case in the aftermath of World War I. As a result of this fear, the capitalist classes were certainly more willing than they had ever been to sacrifice part of their direct control over the economy, if it could help to prevent such a backlash. All the more so, if, by the same token, the illusions created by the states’ new role in the economy would help get workers to accept the turn of the screw required to rebuild capitalist profits – for the sake of “winning the peace”, which was one of the slogans used at the time in Britain. Of course, regardless of governments’ political stripe, the new role of states could not change their nature: they remained, as much as ever, instruments at the service of the capitalist classes.
The postwar settlement – a question of balance of forces
On an international level, the issue of the postwar setup had long been a matter of negotiations between the Allied imperialist governments. As early as 1941 – that is, even before the USA formally went to war against Germany and Japan – talks had started between the US and British governments on how to guarantee postwar monetary stability. After three years of negotiations, an agreement was reached. In July 1944, even before the war was over, delegates from 44 countries convened in the New Hampshire village of Bretton Woods were presented with a fully-fledged Anglo-American plan, largely based on the original US proposals. None of the participants were in a position to object, being either indebted up to their necks to the USA, members of the Sterling Area, or governments in exile whose future power depended almost entirely on the goodwill of US imperialism.
The proposed plan involved a return to a flexible version of the old system of convertibility into gold. All participating governments would have to define an exchange rate for their currency in terms of a certain weight of gold. Each currency would have to be convertible either into gold or into another participating currency which was itself convertible into gold. Currency exchange rates in gold would be allowed to fluctuate within a narrow 2% band around their official rates. In order to help governments to stabilise their currencies, an International Monetary Fund (IMF) was to be set up with $10bn budget and the power to lend the funds required. It would still be possible for a government to change its currency exchange rates, but only provided it had the go-ahead of the IMF. Finally the IMF budget would be financed by contributions from participating countries. Each country’s contributions would be negotiated on the basis of its relative economic weight and would determine its share of voting rights within the IMF governing body. Of course political considerations also played a role in determining these quotas. Thus the USA’s 36% share of voting rights was probably right in terms of its economic weight at the time, but Britain’s 11.5% was a gross overestimation which only reflected the USA’s desire to use its alliance with Britain to totally dominate the new monetary order.
There was one glaring flaw in this system, however: at that point, and for the foreseeable future, only one of the rich countries’ currencies could afford full convertibility into gold – the US dollar. But this state of affairs suited the agenda of US imperialism which was determined to use the opportunity offered by WW2 in order to consolidate its domination of the world economy. And what better means could there be to do that than to turn the dollar into the dominant currency on the world market?
The relationship of forces, whether political, economic or military, provided the US with the means to achieve this goal. But even then, it took some arm-twisting, especially with Britain, whose capitalist class was not too pleased by the prospect of being relegated to a secondary position in international finance. As soon as Japan surrendered, the arrangement which allowed Britain to buy goods in the US on credit was cancelled, forcing the British government to request another huge loan from Washington, on top of its already enormous debt to the US. The US administration offered $5bn, a considerable sum in those days. But in return the US government demanded that the pound should be made convertible into gold. As it happened, however, the pound held out for exactly 36 days. On 20 August 1947, faced with a furious wave of speculation which was threatening to reduce its gold reserves to nothing, London was forced to suspend the pound’s convertibility. And within two years, in September 1949, London had to devalue the pound by 30%, thereby forcing the entire Sterling Area to share the cost of its virtual bankruptcy.
By 1949, therefore, the Bretton Woods system was back where it had started. The US dollar was the only internationally recognised currency, thereby taking over the role played by gold up until the Great Depression, and the other currencies were subjected to it.
Contrary to what is implied today by the numerous politicians and economists who call for a “new Bretton Woods” in order to restore some degree of normality in the world financial system, the Bretton Woods system was never intended to regulate the vagaries of the international monetary system, let alone the world economy. Its purpose was merely to consolidate the dominant position gained by US capital over the world at a time when the other capitalist classes were in no position to put up any resistance. And its institutions reflected this purpose, by being firmly under US control.
Such was the case of the IMF as mentioned before. But so was the World Bank, its other main body. Formed initially under the name of “International Bank for Reconstruction and Development”, its role was to facilitate “the investment of capital for productive purposes” and “to promote the long-range balanced growth of international trade by encouraging international investment”. To all intents and purposes, therefore, the World Bank was there to facilitate the expansion of the imperialist stranglehold over the planet and, although this was never explicitly written into its rules, the US always ensured that its own nominee was elected at its president. In return, the head of the IMF has always been (so far) a European. But then, the IMF had a far more technical role and, anyway it was controlled by Washington.
Bretton Woods goes to the wall
Monetary stability was by no means achieved by the Bretton Woods system. In 1949, already, as many as eighteen IMF members used multiple exchange rates in order to by-pass the rigidity of the Bretton Woods system. And although these tricks certainly helped to facilitate international trade, they merely stoked up imbalances beneath the apparently “smooth” surface of the system.
As the ability of the various capitalist classes to compete on the world market was restored, their rivalries came increasingly to the fore. And as these rivalries intensified, the checks built into the Bretton Woods system soon proved their inadequacy, by failing to prevent the states from using their currencies in order to boost the position of their respective capitalists on the world market. All the dirty tricks in the book were used in order to undermine rivals. Undercover speculation on gold was one of them. The aim of the game was always the same: to improve one’s capitalists’ position as exporters on the world market. In particular, just as in the pre-war days, competitive devaluations became increasingly common, in order to boost exports. Never mind the fact that this game came at a high price for the populations, by cutting their standards of living.
The Bretton Woods system had never been designed to marshall the world’s rival capitalist classes into any sort of discipline. And it did not. But as a means of institutionalising the domination of US capital, it did its job pretty well. Towering above the increasingly chaotic monetary landscape, the dollar remained the pillar of the world monetary order. This meant that the world’s central banks had no option but to pile up dollars in their vaults as a means to preserve the value of their respective currencies. As the world economy expanded, so did the volume of money in circulation and, therefore, the central banks’ needs in dollars. This enabled the US state to print a virtually unlimited quantity of money. And if this money printing resulted in inflation in the US, the Bretton Woods system ensured that this inflation would be exported to the rest of the world and, therefore, that it would be diluted. Bretton Woods allowed US capital to use the world as a whole much in the same way in which, at the same time, the minor imperialist powers used their respective spheres of influence – with Britain exporting its inflation to what was left of the British Empire and France doing the same with its own colonial backyard.
On the face of it, Bretton Woods could pass for the most stable possible set up within the framework of a system as unstable as capitalism. Of course, its stability depended on the US remaining the world’s strongest economy, but this was hardly likely to be put into question. It also depended on the continuing expansion of the world economy. But weren’t the economic “experts” of the time unanimous in their assessment that capitalism had finally overcome its past flaws, thanks to the postwar settlement, and that the world authorities were now so firmly in control of the economy that a return to the pre-war crises was impossible?
The problem, however, was that the very same factors which guaranteed the world’s monetary stability, were also stoking up trouble for the future. The role of the dollar as the world’s universally recognised currency also meant that the dollar was the most sought after currency for hoarding as well as for trading. Moreover, the more unpredictable the other currencies became, the more attractive the dollar became. This generated a huge demand for loans in dollars and since every bank had significant amounts of dollars in their coffers, lending dollars became the biggest financial money-spinner outside the US. And, of course, in keeping with normal banking practices, the amount of paper dollars they lent grew far beyond the amount of real dollars they held in their coffers.
By the same token, the explosion of dollar-lending enticed US speculators and businesses to keep an increasing proportion of their dollars outside the US. Not only could they made big returns by depositing their dollars with foreign banks, but at the same time they could escape the watchful eye of the US tax man! For US banks this was also a convenient way of by-passing the constraints of the Glass-Steagall: US retail banks could not get involved directly in investment banking, but nothing stopped them from entrusting assets to European banks which did not have such constraints!
In the US, the authorities had some degree of control over the volume of loans issued by domestic institutions. But even assuming that they really wanted to clamp down on the profiteering of US capital – which is doubtful anyway – they would have been unable to do so outside their domestic borders, having no control whatsoever over the volume of dollar loans issued by foreign institutions. As a result, there was a huge uncontrolled – and uncontrollable – expansion of the volume of dollars circulating outside the US (whether they were dollars in cash or fictitious dollars lent by banks, made no difference from this point of view) and an increasing exposure of US finance to this growing bubble.
By the late 1960s, this dollar bubble combined with the US public deficit caused by the Vietnam war, produced such a level of dollar inflation that the Bretton Woods system was no longer enough to protect US interests. In August 1971, the US itself decided to ditch the Bretton Woods system they had themselves sponsored, by declaring that the dollar would no longer be convertible into gold. The subsequent snowball effect brought Bretton Woods to a final end 3 years later, in 1974 – after a period of attempting, and failing, to find an alternative. All the rich countries’ currencies henceforth became free-floating.
Ultimately, the very factor which had given an appearance of relative stability to the world monetary system – the dominant position of the dollar – had become a factor in the destruction of this same stability, while at the same time, helping to reduce what was left of the regulations introduced after the Great Depression to total impotence. As always under capitalism, the profit sharks had found ways of working the system to their best advantage, without having any concern for the consequences this might have for the economy as a whole and without the states being either able or willing to stop them.
State intervention in the 1970s
In fact, the demise of the Bretton Woods system and the underlying monetary crisis, went hand in hand with another crisis, comparable to the periodic crises which had affected the capitalist system up until the Great Depression. By the beginning of the 1970s, the period of relative expansion of the rich countries’ manufacturing industries came to an end. The production of goods had become too excessive for the purchasing power of the potential buyers. The demand of goods began to slow down, resulting in a self-feeding mechanism, whereby the capitalists cut jobs in order to make up for a drop in profits or even just to pre-empt it. But by the same token, they also cut the purchasing power of the populations, thereby reducing even more the demand for goods. So much so that, both world production and world trade fell rapidly.
In a number of countries, the state responded by mobilising part of its resources in order to protect capitalist profit. Such was the case of Britain, in particular, which is worth looking into in some detail.
In Britain the signs of crisis were already there in the late 1960s. British capital had developed its parasitism into a fine art, by being more reliant on financial investments abroad than any other capitalist class. Britain’s manufacturing industry had never been modernised and so when crisis struck, it was harder hit than most. The cost of imports went up, living standards went down and, in 1967, the government was finally forced to devalue the pound, thereby fuelling inflation even more.
When the Tories took office in June 1970, unemployment was growing, while output and investment were stagnant. Prime minister Edward Heath faced demands from the capitalist class to address their falling profits urgently.
The Tories’ response was a policy aimed at “reducing” the role of the state in the economy, as they said – meaning, privatisation to provide the troubled capitalists which fresh sources of profits, which had been created in the previous period thanks to public investment. At the same time, the CBI’s demands to cut the taxes on higher incomes and dividends, and to grant allowances on interest payments were accepted. This was “offset” by cuts in the public sector. So charges for school meals, prescriptions and rents were increased, while school milk was axed (by Education minister Margaret Thatcher). By the winter of 1971-1972, unemployment reached a million for the first time since WW2, manufacturing investment fell by 10% and profits remained flat.
The problem for the Tory policy of reducing wages was that it immediately ran into a national dock strike. The government even shipped troops back from Northern Ireland, declaring a state of emergency. But this was just the first of a series of big battles which the working class fought in this period to maintain its standard of living and its bargaining rights. These included an unofficial miners’ strike, a strike by electricity workers, another by Ford workers and a postal strike resulting in the Post Office losing 6.25 million days of work.
It took another miners’ strike in January 1972 to finally bury the Tories’ policy against wages. This was the occasion for another state of emergency, when power was cut off to industry and when 1.5 million workers were laid off work as a result. By this time, inflation was running at 20%.
So the Tories then embarked on getting their already announced Industrial Relations Act into law – to restrict the right to strike and strengthen the control of the full-time trade union officials over the unruly shop stewards who were held responsible for the successful unofficial strikes. Not that it worked. It just unleashed more strikes.
But in the meantime an attempt to hive off nationalised industries was launched by the government, with plans to sell the peripheral activities of the British Steel Corporation and splitting iron from steel making. But this was scuppered by British Steel management and the launching of a modernisation programme, involving a cut of 23,000 jobs.
At this point only Thomas Cook and another travel firm, which both happened to be state-owned, were privatised together with the Coal Board’s brick works, British Steel wire interests, and the government-owned Carlisle pubs.
As for the private companies which were in trouble – it would have been against official Tory policy to help them. As the Industry minister John Davies famously said, the government should not be in the business of propping up “lame ducks”. But it did exactly that when Upper Clyde Shipbuilders (UCS) went bankrupt. It eventually extended credit to UCS in February 1972, allowing the most profitable section of the yards to be sold to the private company, Yarrow (Shipbuilders) Limited, for the nominal sum of £1 in return for which Yarrow received a £4.5m loan. But that was only after a successful and militant “work in” at the yards, which also obliged the company to retain 6,500 jobs out of 8,500.
At the time, there were not all that many public industries which could be turned into profitable businesses for the private sector as a boost for private capitalists. Whereas there was a growing list of big private companies which were getting into financial difficulties. So much so, that the Tories were forced to make a policy U-turn. in February 1971, aircraft engine manufacturer Rolls Royce was nationalised. Of course, John Davies found a justification for a move which went so much against his party’s policy, by arguing that the unique nature of the aircraft industry justified this as an exception to the general policy of denationalisation. The company was, therefore, “saved” by nationalisation – but the price was 4,300 job cuts for workers in other parts of the business.
Expanding credit as never before
It was claimed that the closures of old plants during 1971 had boosted the economy. But the real fuel for this was not an industrial recovery – but the biggest expansion in credit yet seen in the history of British capitalism, up to that point, of course!
This was initiated by a new policy, whereby banks were freed from the direct restrictions inherited from the 1930s and 40s on the volumes of loans they could make – thereby reducing the cost of credit in general.
It was the Bank of England which was supposed to, somehow, keep the volume of credit within sustainable limits. In practice, however, the Bank abandoned any serious attempt at credit control and by the second quarter of 1972, the various forms of money in circulation – including cash and credit – were growing at an annual rate of 31%! At the end of June 1972 there was a run on sterling. £1bn of speculative money was withdrawn from the country and placed in other currencies. This caused a banking crisis, as British banks suddenly had to find the cash to pay overseas depositors who were withdrawing funds. The Bank of England was forced to resort to what Darling does now – that is, “quantitative easing” – without resolving the problem.
The government’s policy to allow interest payments to be offset against income tax hugely reduced the cost of borrowing for the better-offs and encouraged them to exploit all kinds of tax loopholes. Between July 1971 and July 1973, bank lending to individuals rose by 175%! This led to a huge increase in property speculation which sent prices for City commercial property skyrocketing.
Only in December of 1973 did the Bank of England really try to control bank lending. At the same time, the government instituted public expenditure cuts of over £1.2bn. Meanwhile the so-called secondary or fringe banks, which had financed a large part of the property boom, were beginning to feel a credit squeeze. When London and Counties Securities became the first to get into trouble, a run on the other banks began. The danger of a crisis snowballing through the whole banking system prompted the Bank of England to step in with a support scheme known at the time as a “lifeboat”. By the end of 1974, “Lifeboat loans”, funded largely by the main banks, totalled nearly £1.3bn, as the property boom collapsed. Such bailouts were to carry on for another two years.
Despite all of the Tories’ attempts to give capital a helping hand to revive manufacturing industry, it remained under-invested. In fact the Tories were extremely generous in their hand-outs, but to no avail. The Industry Act of 1972 allowed selective assistance to individual firms and by 1973, £1.6bn had been given in aid. There were other, much easier ways for the capitalists to make their money…
Labour bails out British capital
The Tory legacy was reduced exports and soaring inflation. Of course, the effect of the oil crisis had contributed to the government’s difficulties – but this affected all countries. It was another wave of working class militancy which finally unseated Heath’s Conservatives and which allowed Labour to take power in 1974. This presented a Labour government with the task of forcing austerity down the throats of the working class.
The programme on which Labour came to power – which included vague promises to nationalise profitable companies, for instance, was immediately set aside when the crisis hit again in the summer of 1974, affecting every rich country.
Industrial production worldwide fell by 10%, and unemployment rose to 1.5m by the spring of 1975 (although this is probably a gross underestimation of jobs lost). The stagnation which affected all the rich economies was to remain for a decade or more, and unemployment at levels of over one million – at least in Britain- were to become entrenched.
Inflation began to soar again, with rises of up to 19% between July 1973 and January 1974. Chancellor Healey’s first budget reduced corporation tax and loosened price controls. £1bn in loans were made available to companies for investment.
Then came a sterling crisis in June 1975, in the context of a big public spending deficit. The value of sterling against a weighted average of other currencies fell by 29% compared to December 1971. The government then implemented a pay limit in an attempt to curb inflation.
By December 1976, the pound came under more pressure, eventually forcing the Labour government to negotiate a loan from the IMF in order to shore up the currency, in return for a commitment to make $3bn worth of public expenditure cuts over 2 years.
Far more than the Tories had done, Labour tried to provide support to manufacturing bosses. Its National Enterprise Board was responsible for industrial policy, with representatives from the employers, the government and the TUC. The Board had, under Labour’s 1974 programme (passed into law in 1975) the remit to nationalise companies which were profitable. But it had to bid for these companies’ shares in the open market unless their directors agreed to be taken over – which was hardly likely unless the company was bankrupt. And indeed it was only bankrupt companies which were taken over. There were eight of them – Rolls Royce, already nationalised under the previous Tory government, plus British Leyland, Ferranti, Alfred Herbert and International Computers, among others. But what was the main effect? To get through savage job cuts – 19,000 at British Leyland between 1976 and 1977, 5,600 at Rolls Royce, 1,100 at Ferranti, 800 at Alfred Herbert and 1,300 at International Computers.
When the US Chrysler Corporation wanted to pull out of its loss-making subsidiary in the UK, it offered the government £35m to take it off its hands, thus hoping to avoid paying redundancy money and costs of closure. The government was unwilling to see Chrysler close – which meant 25,000 jobs plus 30,000 others in linked industries. But it was also unwilling to nationalise it. Instead, it offered a £55m loan guarantee to Chrysler, which grabbed the bounty and. . . ran, but not before selling this plant to Peugeot.
The biggest single handout to the capitalists was via corporation tax rebates – worth a total £2bn. There were also subsidies for “industrial innovation” of £300m in 1976-7. It was estimated that state assistance to private industry totalled £6bn over these 2 years alone (in addition to the £2bn corporation tax rebates).
Despite all the government’s measures during 1974-79, to hold down wages, to shore up manufacturing, and to save the smaller banks, the net effect on the economy was close to zero. Unlike the postwar nationalisations, which had at least created a large number of jobs, Labour’s nationalisations in the 1970s were merely a way of doing the bosses’ dirty work on their behalf – by cutting tens of thousands of jobs in well-organised companies, which the bosses might have had some difficulty in cutting, not to mention paying for these redundancies. Beyond the rhetoric of Labour’s election manifesto, there was no difference between their policies after 1974 and those of their Tory predecessors – they showed the same determination to serve the capitalists’ interests by compensating their losses through taxation, to respect the shareholders by buying their shares at market price and to make the working class foot the bill for all of that. The only difference was political: unlike the Tories they could rely, to a certain extent, on the willing co-operation of the union bureaucracy.
The state as an auxiliary of big business
Beyond the variety of situations, all the examples described so far reveal striking similarities in the policies of the states when confronted with crises. Whatever the form of their intervention, whether it involves more or less direct public involvement in the economy, the aim (and the result) is never to address the causes of the crisis, but to offset the losses of the capitalist class and to restore the normal operation of the system, so that profiteering can resume its “normal” course. Never mind that it is precisely this blind profiteering which has been the cause of the crisis in the first place.
Not that the policies of the states have ever been successful in restoring the balance of the system. If this balance was eventually restored, it was always as a result of the physical destruction of production facilities, caused by the crisis itself. And, as the events following the Great Depression showed, when this destruction did not happen fast enough to restore the balance of the system, other, much more drastic means were used to accelerate the process, such as the frantic policy of rearmament which, from 1935, helped to rebuild the profits of the capitalist classes across Europe – and paved the way for World War II!
Of course, someone has to pay for the handouts to the capitalist class, so the other main plank of the states’ policies is to make the working majority of the population foot the bill. In this respect, there are an almost infinite number of ways to make the working class pay for the crisis.
Since the present crisis broke out, nearly two years ago, the various forms that state intervention has taken are no longer surprising, even if the way in which the capitalists have been invited to help themselves from public funds, is more and more open and cynical.
The handouts granted by governments to the capitalist class have reached bewildering levels. In the US, the website of the US daily “New York Times” keeps track of the total cost of Obama’s largesse of the banking system and the figure change constantly – always upward, of course – reaching numbers which are so huge that they have long become meaningless. The British government and media do not have such openness and we have to rely on the estimates ventured by some economists, which set the total bill at a level close to Britain’s GDP.
But it is not just the size of these bailouts which beggars belief, it is also the way they are designed to operate. In their “nationalisation” of some of the world’s largest financial institutions, the governments no longer bother to pretend that they are acting in the interest of the populations. On the contrary, they insist on keeping the state-owned banks and insurance companies at “arms length”, as they say – in other words, entirely within the framework of private profiteering. In so doing, they deliberately deprive themselves of any possibility of using their control over these institutions to, at least, offset some of the more devastating consequences of the crisis.
The public funding of private profiteering
The ridiculous charade around the British state-controlled banks stems from this particular logic. Although the government owns over 70% of Lloyds-HBOS and 90% of RBS, it nevertheless insists on having no more than 45% of voting rights in the decision-making of these banks and, even then, it makes a point of being represented by individuals coming straight from the leading spheres of the very same rogue banks that had to be bailed out! While Brown’s ministers have made a considerable amount of noise over the issue of bankers’ bonuses – with little effect as it turns out – at the same time they are adamant that these banks should resume their usual profiteering – necessarily on the backs of the same taxpayers who paid for their rescue. It would be hard to conceive of a more blatant cynicism!
Obama’s latest rescue package, the so-called “Troubled Asset Relief Programme”, which involves the acquisition of $1,000 billion worth of “toxic assets” still hidden in the banking system, is also a case in point. It was advertised by the US administration as a “Public-Private Partnership” in which the risk involved would supposedly be shared between the state and private partners. However, the devil is in the small print. The American economist and Nobel Prize winner, Joseph Stiglitz, was among a number of commentators who proved, with a simple back-of-envelope calculation that, in fact, this was not quite an ordinary “partnership”: while the private “partners” were expected to put up only 8% of the money, they stood to get 50% of the profits if the operation proved profitable, whereas the public purse would bear 100% of the losses if it did not!
However, Darling’s “quantitative easing” probably takes the biscuit among all these hypocritical schemes. It does not even pretend to be aimed at ridding the system of its “toxic assets” as most other bailout schemes do. No, its declared purpose is to allow private owners of so-called “high-quality” bonds (mostly bonds representing money borrowed by the government and the biggest companies) to sell them to the Bank of England in return for brand new electronic pounds, so as to increase their own cash piles. As a result, a host of big companies have been able to offload the truckloads of bonds they had in their coffers and to turn them into cash piles. By the same token, this scheme has given a big boost to a very sluggish bond market, allowing traders to make rich pickings and the most profitable companies to start issuing new bonds (i.e. borrowing on the money market). According to Darling, this huge injection of cash into the economy (meant to reach £125 billion by May) is supposed to benefit the economy as a whole. But how the capitalists will be prevented from using this cash bounty to increase their profits and to speculate, rather than to invest into jobs and socially useful activities, he did not say! And the fact is that this “quantitative easing” may have “eased” the cash balance of the big companies, but it has done nothing to “ease” the bosses’ attacks on jobs.
Predictably, likewise, the banks are still failing to lend to smaller businesses, let alone consumers – and why should they act otherwise, since the governments insisted that resuming lending should only be a “voluntary” counter-part to the bailout, involving no coercion whatsoever? Of course, the coercion that politicians exercise so “generously” on the jobless, cannot possibly apply to the capitalists!
As a rule, the aim of the public bailouts is, quite blatantly, to help the sharks to make profits despite the crisis. If they happen to do something about the crisis itself, so much the better, but that is not their primary aim!
As to the devices dreamt up by the state governments these days to make the working population pay for the crisis, they include savage cuts in public service funding, such as those just announced by Darling in his recent budget, subsidies granted to companies to cover the cost of job cuts, not to mention, of course, those planned in the public sector.
Some of these devices can only be described as pure lunacy. Thus, for instance, the determination displayed by Brown to retain Britain’s opt-out of the European working time directive: at a time when employment is shrinking rapidly, the government is giving the bosses a blank cheque to increase working hours even more, thereby threatening even more jobs.
Even more cynical is the government’s policy as regards workers’ pensions: while it keeps warning against the growing deficit of occupational pension funds, implying that pensions are “no longer affordable” for the economy, at the same time, it declares that the rule which forced companies to make up for this deficit over time, will no longer be enforced! In other words, while Darling underwrites the over-inflated pensions of the likes of former RBS boss Fred Goodwin, at the stroke of a pen, he torpedoes the inadequate pensions of millions of workers – yet another way of making the working class foot the bill of this crisis, not just now, but for many years to come!
The fairy tale of state regulation
In this context, the main purpose of this April’s G20 meeting in London, and of the huge publicity organised around it, was certainly not to find some sort of international “response” to the crisis. The jungle has never been ruled by consensus and the jungle of the capitalist system has never been either. This meeting brought together governments whose primary concern is to protect the rival interests of the capitalist classes they represent. They were just as likely to reach an agreement on a common response to fight off the crisis of their bankrupt system, as hyenas would be likely to agree on sharing out the carcass of a dead buffalo!
No, the real and only objective of this G20 meeting was to make the pill less bitter to swallow for the populations of the rich countries concerned. By going through the motions to seek a common response to the crisis, the governments were merely trying to convince the hundreds of millions whose livelihoods are under threat across the world, of their determination to find an international “solution” to an international crisis – indeed the only logical way to deal with it, but one which is, by definition, ruled out by the very national rivalries which underpin the capitalist market.
Predictably, the grandiose show business of the G20 only managed to slay a mouse – as Brown’s final speech demonstrated so well. This speech was a monument to hypocrisy. He supposedly read the riot act to the so-called “tax havens”. But amongst all the rich countries, the British government happens to have under its authority the largest number of “tax havens” (the £466 billion investment held by over 3,000 speculative funds incorporated in the tiny British isle of Jersey, is just one of many such examples!). What is more, the City of London should surely be considered as the world’s biggest “tax haven”, having built its affluence precisely by offering a “low-regulation environment” to the big US institutions seeking to escape the scrutiny of the US taxman.
But above all, to single out the existence of “tax havens” as a major factor in the present crisis, is a bit like blaming RBS’ speculative lending on the operations of its high-street branches. The overwhelming majority of the 47 banks incorporated in Jersey are subsidiaries of the most respectable big banks. Investment decisions are not made in Jersey, but in London, Paris or New York. And those responsible for the mad speculation of the past decade are wealthy individuals who wine and dine politicians all year round in the capitals of the richest countries of this world. For them, “tax havens” are just convenient devices to maximise their profits. Indeed, it is capitalist greed, not the existence of “tax havens”, which generated their speculative drive. And if “tax havens” did not exist in their present form, we can rest assured that they would find ways of getting their politician mates to design tax “loopholes” specially tailored for their greed. In fact, Brown’s own record while at the Treasury, includes the creation of a bewildering number of such “loopholes”.
It is doubtful that too many people fell for the G20 grand standing. But that was not even the objective. The point was to give credit to the idea that, as opposed to the financial bailouts’ blatant indulgence of private profiteering, state intervention could also involve some sort of “regulation” which might cut capitalist greed down to size, without the need to change the chaotic basis on which the capitalist system itself rests.
Ironically, though, the main measure included in the first “banking reform” legislation adopted earlier this year, was in fact to thicken the veil of secrecy that conceals the operations of the banking system, allowing the Bank of England to rescue troubled banks secretly. But how can any form of “regulation”, allegedly designed to protect the majority of the population against the “excesses” of capitalism, be trustworthy and effective, if it is operated by the capitalists themselves, or their representatives, behind the backs of this same population?
Yet, this is the only kind of “regulation” that is being discussed these days, as part of a growing number of schemes being floated in an attempt to convince working people that, while they are taking the brunt of the crisis, something at least is being prepared to avoid its repetition in the future.
Keynes, myth and reality
On the subject of state intervention and regulation, the name of the British economist, John Maynard Keynes, seems to be coming back into fashion these days, both among economists and among politicians. However this is not a new development – in fact every single significant hiccup of the capitalist system has brought Keynes’ name back into fashion since the 1970s.
Where does Keynes fit in, in all of this? This former Cambridge economist appears to be seen as a sort of symbol of radical economic thinking representing, supposedly, a vision of capitalism, which is both humane and affluent. So much so that, 63 years after his death, Keynes’ economic ideas, known as Keynesianism, have been and are still championed by a very wide political spectrum. Thus, a notorious reactionary like US president Richard Nixon, went famously on record, while in office, claiming: “we’re all Keynesians, now!”
At the same time all sorts of people, ranging from “old Labour” supporters and trade-unionists, to greens and anti-globalisation campaigners, still insist that should Keynes’ ideas be implemented by present day governments, all would be well in a benevolent capitalist world. Never mind the fact that this is, in and of itself, a contradiction in terms. How can a social organisation based, as capitalism is, on the exploitation of the working-class majority by the idle capitalist minority be benevolent to anyone, except to the capitalists themselves?
But then, Keynes, himself, perfectly encapsulated this contradiction. In fact, in hindsight, one can only come to the conclusion that Keynes must have had a split personality. On the one hand, there was the Cambridge scholar, who was an acerbic critique of what he considered the “excesses” of the capitalist system of his time. On the other hand, there was the practical economist who, as a government adviser and life-long associate of the Liberal party, was involved in some of the nastiest deeds of British imperialism.
This is precisely what makes Keynes so appealing to such a wide variety of people. Keynes’ critique of the ills of capitalism may seem to fit in with the common sense perception of this dysfunctional system by those who are at the receiving end of its chronic chaos, especially in periods of crisis. But, at the same time, he was a man of the Establishment, who brushed shoulders with the rich and powerful, sat in high positions in government circles, took part in historical international negotiations such as those leading to the settlements which followed the two World Wars, and finally agreed to join the ultimate symbol of parasitism known as the House of Lords. Above anything else, Keynes is a respectable authority to be called upon, one that cannot possibly imply a rejection of the flawed foundations on which capitalism is based, one that is “safe” in every respect.
So, Adair Turner, the former CBI director general, and an arch-champion of capitalist exploitation, feels perfectly safe in quoting, in his recent review of the banking system, the famous description that Keynes gave of financial speculation in 1936. In this description, Keynes compared financial markets to ” those newspaper competitions in which the competitors have to pick out the six prettiest faces from 100 photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which to the best of one’s judgment are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” Who would dispute the validity of such a description, especially in view of the mad speculation that triggered today’s crisis?
In Keynes’ view, however, the fact that financial markets were so divorced from economic reality as to display such irrational behaviour, had nothing to do with the built-in contradictions of an economic system based on the cut-throat competition between individual owners of capital. For Keynes, this irrationality simply reflected the governments’ failure to put some order into their backyards in order to get the capitalists to behave themselves! Never mind the fact that it is hard to conceive of anything rational in buying and selling pieces of paper representing an unknown abstract value which may or may not materialise at some point in the future! Compared to this kind of lottery, gambling on horses or football matches appears a lot more rational – after all, horses and players have a known history and races and matches are available for all to see on television screens, which is a lot more than can be said of financial gambling.
Precisely because of Keynes’ inconsistency, Turner was able to add, after the above-mentioned quote, a hundred pages of recommendations supporting measures designed to counter-balance the irrationality of the financial markets and banking operations. When, in fact, both the description by Keynes of the problem and plain old common sense would suggest just one simple sentence: “scrap the whole bloody system!” But since Keynes himself did not take his own criticism of the capitalist system to its only logical conclusion, why should Turner feel embarrassed by such contradictions?
Nowadays, many economists and political activists urge governments to adopt Keynesian policies as a means to counter the social catastrophe caused by the crisis, often referring to Roosevelt’s New Deal as a blueprint of what should be done. However, it must be said that, contrary to common belief, Keynes played no role whatsoever in shaping any of the policies followed during the Great Depression. In fact, Keynes confined himself to the comfort of his academic position in Cambridge, occasionally writing newspaper columns, but never putting any significant effort into popularising his criticisms of the madness which had led to the crisis.
Where Keynes departed from official economic thinking at the time, was in his assessment that the policies implemented by most governments, aimed at driving wages down in order to cut the capitalists’ labour costs, could only make the crisis worse than it needed to be. He argued that public resources should be used to boost productive investment and employment, thereby increasing the purchasing power of the working class majority and filling manufacturing order books. However, Keynes was not the only economist to promote this approach. And when it was finally put into practice, albeit in a very limited way, with the US New Deal, it was not due to the influence of Keynes’ ideas but rather as an opportunistic response to the pressure of circumstances. Nevertheless, the fact that a man of the Establishment like Keynes happened to promote the policies implemented in the New Deal seems enough, today, to give him the intellectual credit for these policies.
Ironically, there was absolutely nothing new in Keynes’ ideas. His critical analysis of the chaotic workings of capitalism had been formulated long before him, in greater depth and in much more detail, by Marx and his followers. The difference was that, unlike Marx, Keynes never went so far as to question the foundations of capitalism itself. And, unlike Marx, Keynes never freed himself from the social prejudices of his class. He was an anti-communist who hated Marxism and the social choices it implied, to the point of describing it as a “creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement (..) It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process which has changed all his values.”
“Regulating” will not do – the system needs to be thrown out!
The Turner report criticises at great length all the assumptions on which past financial regulation was based – including the idea that financial markets are inherently efficient and rational and that they are capable of spontaneously repairing their own imbalances. Of course, this is the very least that Turner could do, since if the present crisis has exposed anything, it is precisely that all these assumptions were pure nonsense.
What he adds next, however, is not an exposure of the capitalist market itself, which would have followed logically from the preceding analysis, but a long list of controls that a regulatory system “worth its salt” should put in place to “tame” the market’s irrationality and lack of efficiency. Significantly, if one leaves aside the much higher degree of sophistication in today’s markets and the much larger scale on which they operate, Turner’s recommendations to “reform” the banking system have a striking resemblance to the recommendations which led to the launch of the Bank of International Settlements (BIS), in 1930, and the formulation of its banking rules. And this is hardly a reassuring, given that the BIS rules, which are still in force today after many refinements , failed spectacularly to stop financial crises from occurring, whether in 1932 or today.
But, in fact, even these very modest recommendations have already triggered some passionate polemics in the columns of the business press, with many commentators and business high-flyers taking exception to any suggestion (hinted at, but not even formulated by Turner) that, maybe, banks should be kept below a certain size, or that their functions should split up, as the old Glass-Steagall act of the 1930s did, in order to limit the risk of speculative bubbles. Even before actual regulations are on the agenda, they are already stirring outrage among the capitalists, who are already busy seeking ways of watering them down or ignoring them altogether.
However, the most striking similarity between Turner’s proposals and those of his predecessors, is the fact that while spelling out why and how financial crises may occur and, therefore, what should be the objectives of financial “regulation”, they do not say a word about how these objectives might be enforced against the frenzy of profiteering which is one of the main characteristics of the capitalist system, and by whom.
Yet, if nothing else, the developments of the last few months, expose the fact that even the most “extreme” form of regulation under capitalism – state control over several of Britain’s largest banks – can be turned into an instrument to help the capitalists’ profiteering rather than to contain it. Far from using this opportunity to rationalise the financial sector, if only by pooling together all the resources of the banks they control, in order to finance useful investment across society, the politicians in office see no role for their “regulation”, other than to keep these banks going on the very same basis as if they were privately-owned, with the obvious additional objective of being able to return them to the private sector once their debts are cleared.
There lies the real problem with the whole concept of “regulation” – because our social organisation is such that the capitalist class, whose profiteering activity is the cause of crises of all sorts, is at the same time, by virtue of the fact that it owns everything, supposed to be in charge of protecting society by controlling and limiting the extent of its own greed. Whereas the working majority of the population, that is the only force in this society to have no stake in this profiteering, is confined to the role of passive spectator and victim of the capitalist thieves!
A long time before Turner, or even Keynes, Marx exposed the failings of capitalism and its financial mechanisms. He explained how the credit system exacerbated the contradictions of capitalism for the very same reason that it accelerated the development of the economy. And his conclusion was not to call for some form of “regulation” of the system – which would only have constrained its economic expansion – but to make a simple statement of fact, stressing how the credit system actually paved the way for a new social and economic organisation, which would replace capitalism:
“The credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection. At the same time credit accelerates the violent eruptions of this contradiction – crises – and thereby the elements of disintegration of the old mode of production. The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to a new mode of production.”
Fighting the greed of the capitalist class is one thing – something that needs to be done permanently, if only to reinforce the position of the working population in the relationship of forces between classes in this society. But the working class has no interest in entrusting its future to a capitalist system “regulated” by its own sharks – necessarily for their own benefit. Unlike the capitalists à la Turner, who may feel brow-beaten by the bankruptcy of their own system, but are desperate to cling to its irrational operation, the working class has no reason to fear the end of capitalism and the advent of a new social and economic organisation, controlled by those who produce all goods and services with their labour, and freed, once and for all, from today’s capitalist profiteering.