Every time an economic crisis erupts, capitalism’s apologists are quick to point the finger at some superficial cause or unpredictable accident beyond their control. The finest schools in the country are full of learned academics who swear that the 2008 crisis was the result of risky subprime mortgages or that “irrational” panic on the New York Stock Exchange caused the Great Depression. While these paid propagandists of the ruling class barely skim the surface of great historical events, Marxists dive deeper to discover the truth.

Marx laid bare capitalism’s inner workings and showed how every economic boom prepares the ground for a future slump. In the words of Ted Grant, the postwar era’s foremost Marxist theoretician:

The fundamental cause of crisis in capitalist society, a phenomenon peculiar to capitalist society alone, lies in the inevitable overproduction of both consumer and capital goods for the purposes of capitalist production. There can be all sorts of secondary causes of crisis, particularly in a period of capitalist development—partial overproduction in only some industries; financial juggling on the stock exchange; inflationary swindles; disproportions in production; and a whole host of others—but the fundamental cause of crisis lies in overproduction. This, in turn, is caused by the market economy, and the division of society into mutually conflicting classes.

Revolutionary theory can give us the advantage of foresight over astonishment—but only if we have studied and assimilated the fundamentals of Marxism ahead of earthshaking events.

Global trade war

Such events won’t be long in coming. Trump’s tariffs threaten to provoke a global trade war. Some estimate that the resulting “geo-economic fragmentation” could wipe out as much as 7% of world GDP.

During capitalism’s ascendancy, tariffs could play a progressive role by protecting developing industry. Today tariffs are a symptom of the opposite: a system in decline.

Trump promises that tariffs will usher in a new “Golden Age” of prosperity and jobs. But the ruling class will only invest in production if they see the possibility of a profitable return. It would take a massive investment to “reshore” manufacturing and reorganize global supply chains—meaning it would take years for them to see a profit. Even if they return some jobs to the US, the wages and conditions of American workers would have to be driven down to compete with labor prices on the world market.

In the age of imperialism, as Lenin explained over a century ago, the bourgeoisie can realize far greater profits through usury and stock market speculation than from industrial production. That’s why capitalists spend so much of their money buying back shares of their own companies. Between 2003 and 2012 the S&P 500 poured 54% of their earnings into stock buybacks to inflate their share prices.

A similar speculative frenzy preceded the Great Depression, but it was the infamous Hawley–Smoot Tariff Act of 1930 that turned the downturn into total devastation for the world economy. Other countries replied with retaliatory tariffs, leading to a 66% decrease in world trade. With the capitalists already producing more than could be profitably sold on the market, this dramatic contraction set off a downward spiral.

Between 1929 and 1933, US GDP plummeted from $104.6 billion to $57.2 billion. In the same period, unemployment skyrocketed from near zero to a peak of almost 26%. While your high school history textbook probably emphasized the role of the New Deal, it wasn’t until FDR sucked the country into World War II that unemployment fell below 1930s levels.

Each crisis of capitalism has its own features, but there are important lessons today’s revolutionaries can learn from studying the Great Depression. We are once again entering a stormy period of crisis, instability, and explosive class struggle.

The Wall Street Crash

October 29, 1929, now known as “Black Tuesday” was one of the defining moments of world history. Almost overnight, the lives of millions of people were upended by the “invisible hand” of the market. The relative stability of the previous decade (in the US at least) had come to a dramatic end.

The late 1920s had seen an unprecedented frenzy of speculation on the American stock market. By 1928, it wasn’t uncommon for some shares to rise in price by 10%, 15%, or even 20% in a single day. With the market soaring, anyone with the means to invest wanted a piece of the action.

Some warned about the dangers of a bubble, but nobody wanted to get off the ride while the going was still good. Investors borrowed billions to buy shares, often using the very same shares as collateral for the loans. So long as prices were rising, everyone was happy.

But sooner or later, every bubble must burst. The market peaked in September 1929. By Friday, October 18, heavy losses were recorded on the New York Stock Exchange, and continued to get worse over the next few days.

Real panic set in the morning of “Black Thursday,” October 24. Investors scrambled to sell their shares at almost any price. Shares in some companies couldn’t be sold at all. Sensing catastrophe, chairmen of the leading Wall Street banks rushed to declare their support for the market. This calmed things down . . . for a few days.

By Monday, the collapse was back in full swing. No amount of bankers’ support could hold back the tide. In fact, the big banks were rushing to save themselves by unloading their own holdings.

Tuesday, October 29, saw the worst day of trading in the history of Wall Street. In the first 30 minutes of trading, 33 million shares were sold. The Dow Jones Industrial index fell by 30 points, wiping out all of the gains of the past year. In the space of two days, the index fell by 23%. The bubble had well and truly burst.

The implosion continued until November 13, when the index closed at 198—nearly 50% below its September high. A temporary recovery occurred from January to March 1930. It seemed as if the worst were over. President Herbert Hoover stressed to investors that “the US economy is fundamentally sound.”

But the economy was far from sound. Starting in April 1930, the stock market tumbled again. The index declined almost every week until it hit rock bottom in July 1932. By that point, the Dow Jones was at 42, compared to its September 1929 peak of 381—a loss of 89% in less than three years.

Share prices would not begin to rise again until early 1933. The recovery was so weak that it would take until 1937 to climb back to the November low of 1929. But then in 1937 the economy slumped again, and only revived due to World War II.

What caused the crash?

Irving Fisher, a leading bourgeois economist during the Depression, said that the crash was simply “a great accident,” caused by a “psychology of panic.” Perhaps he intended to reassure nervous investors, but this was an explanation that explains precisely nothing.

Other capitalist economists have pointed to any number of factors in their attempts to explain the crash and the Depression that followed.

John Kenneth Galbraith, in his famous book, The Great Crash, 1929, argues that the crash resulted from the inevitable bursting of a speculative bubble. But he then argues that the reason for the subsequent Depression was due to a number of weaknesses in the economy, including (among others):

• Unhealthy corporate structures. Prior to the crash, large conglomerates and investment trusts discovered that they could “leverage”—i.e., multiply the effects of rising share prices—through complex company structures. When share prices dropped, the effects were multiplied in reverse.
• The weak banking structure. Banking in America had yet to be centralized. Thousands of small banks dotted the country. With no federal insurance on deposits, the collapse of a bank would often spark a run on others, igniting a chain reaction.
• The unequal distribution of income. In 1929, the richest 5% of the population took home approximately one-third of the income. The economy was reliant on high levels of luxury spending and investment in capital goods. When this took a hit in the crash, a large chunk of demand in the economy was wiped out.
• The balance of trade. After World War I, the US became a creditor nation. When the crash occurred, many countries couldn’t pay their debts in gold. Nor could they increase exports to America, due to the imposition of tariffs. Their only option was to reduce their own imports from the US—resulting in shrinking markets for American commodities.

While all of these factors had an effect in exacerbating the depth of the slump, none of them really explain why the crash occurred in the first place.

With or without these factors, crises are an inevitable feature of the economy under capitalism. The Wall Street Crash and subsequent Great Depression were products of the contradictions capitalism had built up during the preceding boom.

The “Roaring Twenties”

Rich Americans had never had it so good as during the boom of the 1920s. Of course, conditions for most workers remained awful. But the US rapidly developed from the late 19th century to become the world’s leading industrial power after World War I.

In 1900, the total wealth of the US stood at $86 billion. By 1929, this had increased to $361 billion. This era saw the rise of the first billionaires, like Rockefeller and Carnegie, who consolidated monopoly positions over entire industries such as oil and steel.

Of the 300,000 companies in the US, just 200 controlled nearly 50% of the total assets. As a result, the richest 0.1% received the same income as the poorest 43% in 1929.

From 1919 to 1929, the average labor productivity in 59 industries rose between 40–50%. With prices and wages remaining stable, this meant rapidly increasing profits for the rich and an explosion of inequality. During the boom from 1924–29, industrial profits rose by 156%.

Over the same period, the price of industrial shares tripled. So although the economy was expanding, stock prices were rising at a much faster rate than their earnings potential from dividends.

In other words, there was a huge increase in fictitious capital. This was facilitated by the practice of buying shares “on the margin,” i.e., paying only for a small fraction of the total price, with the rest being loaned.

Markets for commodities became saturated. In contrast, share prices on Wall Street were rising. This meant it was more profitable to speculate on the stock market than to invest in actual production. With more and more capital seeking a profitable outlet, the rise in share prices took on a logic of its own. Fortunes could be made simply by riding the wave of the rising market.

Overproduction

As Marx explained, every boom under capitalism develops inevitably into its opposite—a crisis. Why? Because production is organized for profit, and profit only. This profit comes from the surplus value produced by the working class over and above that which it receives in the form of wages.

But in order for the capitalists to realize this profit, they must first sell the commodities that the workers have produced.

Taking the economy as a whole, if the working class produces all value, but is only paid a fraction of this value in the form of wages, who can actually buy all the commodities produced? There’s a limit to how much the rich can consume. Shouldn’t the system therefore be in permanent crisis?

Capitalism can overcome this contradiction through a number of means. Firstly, by expanding the market. From the late 19th century, American imperialism did this by directly or indirectly colonizing large parts of Latin America and other countries, like the Philippines. But with every imperialist power attempting the same thing, this kind of expansion will also reach its limits.

Secondly, not all commodities are produced to be bought and consumed by the working class. In order to compete with their rivals, capitalists must expand production. This requires investment in machinery, raw materials, and infrastructure.

However, this does not fix the problem, but instead sets it up again on a higher level. To put this expanded productive capacity to profitable use, more commodities must be produced. These, in turn, must themselves find a market.

In the late 1920s, capital investment was slowing down as markets were increasingly saturated. Even during the peak of the boom, unused manufacturing capacity stood as high as 20% in some sectors. Why invest in expanding production, if it wasn’t even profitable to use existing capacity?

Thirdly, credit is used to artificially expand the purchasing power of consumers. This was done internationally, money was lent to other countries so they could import American goods, and internally with the increasing use of installment plans to purchase domestic goods.

But the use of credit has its limits, too. Eventually the borrower must pay back the loan—with interest. It is a means of temporarily expanding the market today, at the expense of the market in the future.

All of these means can only delay the inevitable crisis of overproduction. This is a phenomenon that is unique to capitalism—a crisis grips the economy because “too many” things are produced; not too many things to satisfy people’s needs, but too many things to be sold profitably on the market.

By early 1929, there were signs that the system was reaching its limits. Figures for American car production, a key industry, illustrate this clearly. Production declined from 660,000 units in March 1929, to 440,000 in August. In September, it dipped to 416,000, then to 319,000 by October. By November, after the stock market crash had begun, production slumped to 169,500, falling to 92,500 in December.

The Federal Reserve’s Index of Industrial Production (IIP) showed a similar trend. Taking the level of 1923 to 1925 as 100, production reached a high of 126 in June 1929. This fell to 122 in September, 117 in October, 106 in November, and 99 in December. It was clear that profitable markets were drying up. The system was tapped out.

Nobody knows for sure which spark actually lit up the panic on Wall Street. Some say the collapse of Clarence Hatry’s financial empire in Britain spooked investors in New York. Or maybe it was the declaration of a regulatory investigation into Boston Edison, which reported that speculators had massively overinflated the value of its shares.

Whatever the trigger, it was merely the accident that gave expression to the deeper necessity of a system already teetering on the edge of crisis. All the contradictions of the previous period had built up to breaking point.

When a forest that has been dried out over years, all it takes is a single match to set it ablaze. The Wall Street crash was simply the surface expression of a much deeper process of crisis which would engulf the entire system.

Depression

The crisis on Wall Street quickly rippled through the rest of the economy. The collapse of share prices meant that loans taken out to buy shares “on the margin,” were quickly called in. Credit, used to expand the boom, had now turned into its opposite. Instead, unpayable debts had to be repaid. A wave of defaults caused a crisis in the banking system.

With no federal insurance on bank deposits, a collapse of a bank meant losing your entire savings. Bank runs became commonplace. Between 1929 and 1933, over 9,000 US banks collapsed.

Even before the crash, companies were cutting production as the market was saturated. Now, as both demand and credit dried up, so did investment. Millions of workers were laid off, as they could no longer be profitably exploited. This led to a vicious circle with each further collapse in demand causing a wave of corporate bankruptcies, leading to even higher unemployment.

By the Spring of 1930, a major decline in production and investment set in, as profitability dried up. The IIP declined from 110 in 1929 to 57 in 1932—almost a 50% fall. Private construction fell even further—from $7.5 billion in 1929 to $1.5 billion in 1933.

The crisis of overproduction is most graphically illustrated by the figures for capacity utilization. According to Donald Streever, capacity utilization in 1920 stood at 94%, and averaged 84% in the twenties. By 1930, it had fallen to 66%, and reached a low of 42% in 1932. In July of that year, steel operations in the US used just 12% of their potential capacity.

The only way for the ruling class to eliminate this “excess capacity” was to close down factories and lower prices. This caused deflation—a decline in the value of the dollar—since the unemployed could not afford to spend. Those who had money were reluctant to spend today, since prices would likely be lower in the future. Deflation also meant that servicing debts became relatively more expensive, further dragging down the economy. The potential for a repeat of this downward spiral cannot be ruled out today.

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Social crisis

As with any crisis under capitalism, it was the working class and poor who had to foot the bill. The “Great” Depression was a massive attack on the already low living standards of workers and poor farmers. The crisis in the economy was quickly transformed into a social crisis of epic proportions.

Unemployment skyrocketed. In 1929, 1.5 million were already unemployed (about 3% of the workforce). This leapt to more than 12 million by 1932, and an estimated 13 million by March 1933 (no official records were kept). This represented around 25% of all workers, and 37% if you exclude farmworkers.

Overall, 34 million Americans belonged to families with no regular full-time wage earner. With no federal system of unemployment insurance, workers were forced to turn to whatever limited charitable relief existed—or face literal starvation.

Unable to pay the rent, millions ended up homeless, traveling the country in search of work. Homeowners were also caught in the crisis. An estimated 844,000 non-farm mortgages were foreclosed, out of a total of five million. Hundreds of thousands ended up in what became known as “Hoovervilles”—shantytowns built out of scraps of cardboard, wood, and metal on derelict land.

In the context of these conditions, the bosses sought to restore profitability by driving down wages and increasing hours. Sweatshops appeared everywhere. Starvation wages were common, as was child labor. Many worked 60–70 hours a week.

With the shock of the crisis, the threat of destitution, and the lack of leadership from the trade unions, the bosses were largely successful in their attacks. Nonetheless, there were massive class battles and powerful industrial unions were created—an inspiring story for another article.

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World crisis

With capitalism already operating as an integrated world system, the crisis in America quickly spread to other countries. In 1929, four major powers accounted for 70% of world GDP—the US, Britain, Germany, and France. Any disruption to world trade or capital flows would therefore have global repercussions.

When capitalism was booming, America was prepared to loan vast sums of money to help countries buy its goods. With the system in crisis and defaults on the rise, international creditors demanded payment in gold. This set off a chain reaction of defaults across the world.

All the major powers attempted to reduce their trade deficits by increasing their exports. In effect, they were trying to pass the burden of the crisis onto other countries. America tried to protect its domestic market by substantially raising tariffs in June 1930. This had a devastating impact on the European economies.

To facilitate exports, countries devalued their currencies by coming off the gold standard. Britain came off in September 1931, followed by the US in 1932. Despite attempts at international cooperation, a wave of competitive devaluations followed. The logic of competition between the different national ruling classes for a shrinking world market was too powerful to be overcome by international agreements.

The overall effect was a collapse of world trade, which helped turn the slump into a global depression. In 1929, American exports totaled $5.2 billion, while imports amounted to $4.3 billion. By 1932, American exports had fallen by 69% to $1.6 billion, and imports declined by 70% to $1.3 billion. According to the League of Nations, world unemployment nearly tripled in this period to around 40 million workers.

The next economic crisis will not be identical to the Great Depression. But as long as capitalism is allowed to continue, the fundamental contradictions giving rise to such crises cannot be avoided, and the workers and poor will be made to pay. By studying the history of the past, we can better prepare for the crises—and class battles—of the future.