From great depression to deep recession

Politics and economics are twins, shaped and driven by power relations. A financial crisis does not happen within a political vacuum. Politics and policy choices often shape, make and break economies and their financial architecture, so it is important to unpack the political contexts, causes and consequences of this current financial crisis. There seems to be a clear connection between war, economic crisis and political transition.

In spite of the confident rhetoric of political leaders, the economy has not necessarily danced around to their beat. In early 2007, George W. Bush boasted that the ‘economy is powerful, productive and prosperous’, a statement that is worth to comparing with the message of President Calvin Coolidge to the US Congress on 4 December 1928: ‘Enlarging production is consumed by an increasing demand at home and expanding commerce abroad. The country can regard the present with satisfaction and anticipate the future with optimism.’ Within less than a year of that statement, on 29 October 1929 the great crash happened at the New York Stock Exchange, in arguably the most traumatic experience in the history of capitalism. The near universality of this economic crisis and its political implications are not too far to forget.

The political context of the great depression and the ongoing financial crisis are not the same. However, there is one shared context: the concentration of wealth within few hands, and the consequent increase in inequality. The prosperity of the USA in the 1920s was very fragile: 5 per cent of the population received more than one third of the country’s total income and 70 per cent had an annual wage hardly good enough for survival. The roots of the great depression can be traced back to the consequences of the First World War. And the consequences of the great economic crash in the early 1930s made enabling conditions for the rise of fascism as well as the context for the Second World War. This eventually led to the reordering of the world in the aftermath of the Second World War. However, there is a substantial difference between the political context of the great crash and that of the ongoing financial and economic crisis.

The present financial crisis is a result of the cumulative impact of the neoliberal economic paradigm and unbridled financial capitalism in the last twenty years. The globalisation of markets, the media, technology, and finance went hand in hand with the globalisation of discontent and of terror. They fed into each other with increasing virulence. Thus economic growth was accompanied by inequality, injustice and reactionary politics. George W. Bush and Osama Bin Laden also fed into each other. The rise of neoliberal capitalism – driven by hyper-consumerism and economic growth – perpetuated a new addiction for oil.

This oil addiction shifted the theatre of international politics to the west Asian and Gulf Countries. The powerful countries sought to control oil and other natural resources through the power apparatus of the military and markets. This created new forms of imperialism and militarisation. The new oil economy irrigated markets, war machines and terrorism. Though the Gulf War in the early 1990s proved to be a profitable enterprise for the USA, the Iraq war proved to be a losing game in terms of economics and politics. The economy, military and unilateral power of the USA got overstretched and became increasingly brittle. In spite of the boastings of Bush, the economy began to bleed in the context of a costly war. It was estimated that around US$ 3 trillion was used to blow up Iraq, killing hundreds of thousands of people and making deep wounds in the world as well in the economy. The eclipse of military adventurism and casino-capitalism eventually shook the political power of the White House and Wall Street’s economic muscle.

The context of the great depression in the 1930s needs to be located in the inter-war economic and political order of the world. The crash of the New York Stock Exchange on 29 October 1929 led to a deeper universal crisis, which at that time looked like a collapse of the capitalist world economy. However, it is important to note that at that period communism was still a viable economic and political alternative to capitalism. In spite of the great depression, the economy of the USSR was less affected due to the strength of the state-controlled Soviet system. The economic and political consequences of the First World War also created a fertile ground for the rise of right-wing militant politics in the form of nazism in Germany and fascism in Italy and other parts of Europe. Though the USA emerged as an important player in the aftermath of the First World War, the country was neither a unilateral superpower nor had the dollar become the super currency of the world. Capitalism and finances were far less globalised than the preset time. The political economy of oil was still in its early stages. The world was still a big colony of the European powers.

Now the context is dramatically different. It is an irony of history that the USA blew up lots of money for its wars in the Gulf and Iraq, only for its economy to now have to depend on the money and oil from the very same Arab world. The USA has to depend on the trillions of foreign exchange reserves from the Gulf countries, along with other Asian countries such as China, Japan and India. Many of the top banks and business enterprises in the West are increasingly owned by rich Arabs through investments as well as the strategic use of the national sovereign funds of many Gulf countries. While the market in the Europe and the USA became increasingly saturated, the new power of vibrant markets shifted to emerging economies of Brazil, Russia, India and China.

The dramatic recession in the USA in 1930 spread to Germany and the rest of the world. The industrial production in the USA and Germany fell about a third from 1929 to 1931. There was a slump in the demand and price of primary commodities, including rice, tea, coffee, wheat and silk. Many of Asian, African and Latin America countries dependent on the export of primary commodities suffered due to the slump in demand. World trade fell by 60 per cent. The crisis resulted in the rise of massive unemployment, which varied between 20 to 50 per cent in different countries. The failure of banks and the credit-crunch led to the great stock exchange crash. By the second half of 1930, 603 banks had failed, including the Bank of the United States, which accounted for the loss of about one third of the total deposits. By January 1932, 1,860 banks had failed. Automobile production – a key sector of the economy at the time – reduced by more than 50 per cent within two years. The combined output of the world’s seven economies declined by around 20 per cent within three years between 1929 and 1932. Millions lost jobs and unemployment in the USA and Germany rose to above 33 per cent. The depression resulted in a sharp increase in tariffs and resultant reduction in international trade, with world trade almost collapsing. In fact, Great Brittan – the original imperialist masters of ‘free trade’ – abandoned the policy in 1931.

However, the immediate response in the USA to the depression was a series of half-baked, panicked policies, including protectionism, cutting deficits and a more conservative budget with less public expenditure. This made the situation worse. It took another five years of concerted effort to re-energise the economy. And as a matter of fact, the Second World War helped the USA to increase demand and production to shift the economy into a pattern of growth.

Indeed, the seeds of the Second World War proved to be in the ‘reparations’ imposed on Germany in the Versailles peace conference in 1919 for the cost of the First World War and damage done to the victorious powers. Though John Maynard Keynes, who participated in the Versailles peace conference as a young economist in the British delegation, warned against ‘reparations’ in an illuminating 1920 paper entitled ‘The Economic Consequences of Peace’, the political leaders of the day ignored his arguments. As a result Germany plunged into an economic crisis in the aftermath of the First World War, providing fertile ground for the rise of Adolf Hitler and nazism.

There is a connection between economic crisis, political turmoil and possible shifts in governance. Germany was indeed a major industrial power and when the country’s crisis was followed by the crash of the US economy, there was a much more of an impact, both economic and political. This situation gave rise to fascism in many parts of Europe. But it also gave rise to the New Deal of President Franklin Roosevelt in the USA, following the economic model of John Maynard Keynes. The New Deal consisted of a series of policy and economic measures to address unemployment and stimulate economic growth. The first New Deal programme (1933–35) sought to restore public confidence and resulted in a series of legislations, including one on public works and policy measures. The second phase of the New Deal began in 1935. Path-breaking social legislation included the Social Security Act (a scheme for unemployment insurance, disability insurance and old age pensions), the Wealth Tax Act, and the National Labour Relations Act. In the eight-year history of the New Deal, a total of US$11 billion was spent and provided employment for 8 million workers in the USA. The New Deal signified the role of the state in the redistribution of wealth. Though the package was a radical step in many ways, it did not help to completely address the economic crisis, as the USA again faced a recession in 1937–38. However, it did however represent far-reaching and stunning socio-economic reforms and established the role of an interventionist state, thus beginning the political legitimacy for the welfare state across the world.

The current financial crisis may lead to a deep recession and such a development will be powerful enough to shape new paradigms of policy, development and institutional frameworks in the next five years. The great depression was the beginning of a paradigmatic shift in the policy, politics and nature of the USA and indeed other countries. It may be too earl to predict the political outcome of this financial crisis, but one could see multiple shifts in the political process and governance in the years to come.

The ongoing financial recession played a very important role in shifting the politics of the USA. It is yet to be seen whether Barack Obama’s team can turn the tide of politics and economics. There is indeed a danger of conformist politics with a high doze of optimistic rhetoric. A black man in the white house may be a great political symbolism. But whether it will transform the world’s politics and economics remains a trillion-dollar question.

* John Samuel is a social activist and the International Director of ActionAid.
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