Lecture eight: The 1920s—the road to depression and fascism

Part 5

By Nick Beams
10 October 2005

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The following is the fifth and final part of the lecture “The 1920s—the road to depression and fascism.” It was delivered by Nick Beams, the national secretary of the Socialist Equality Party of Australia and a member of the WSWS Editorial Board, at the Socialist Equality Party/WSWS summer school held August 14 to August 20, 2005, in Ann Arbor, Michigan. The lecture will be presented in five parts.

This is the eighth lecture given at the school. The first, entitled “The Russian Revolution and the unresolved historical problems of the 20th century” was posted in four parts, from August 29 to September 1. The second, “Marxism versus revisionism on the eve of the twentieth century,” was posted in three parts on September 2, 4 and 5. The third, “The origins of Bolshevism and What Is To Be Done?” was posted in seven parts from September 6 to September 13. The fourth, “Marxism, history and the science of perspective,” was posted in six parts from September 14 to September 20. These lectures were authored by World Socialist Web Site Editorial Board Chairman David North.

The fifth lecture, “World War I: The breakdown of capitalism,” was delivered by Nick Beams, the national secretary of the Socialist Equality Party of Australia and a member of the WSWS Editorial Board. It was posted in five parts, from September 21 to September 26. The sixth, “Socialism in one country or permanent revolution” was delivered by Bill Van Auken and posted in three parts, from September 27 to September 29. The seventh, “Marxism, art and the Soviet debate over ‘proletarian culture,’ ” was given by David Walsh, the arts editor of the World Socialist Web Site, and posted in four parts from September 30 to October 4. The ninth, “The rise of fascism in Germany and the collapse of the Communist International,” was delivered by Peter Schwarz, the secretary of the International Committee of the Fourth International and a member of the WSWS Editorial Board, and posted in three parts from October 11-13.

Dynamics of a systemic crisis

The postwar global economy was wracked by a profound structural crisis. United States capitalism was undertaking a rapid development, but at the same time it was increasingly dependent on European capitalism, which had begun to fall back not only relatively but in some cases absolutely. This contradiction was to deepen throughout the 1920s, notwithstanding the postwar recovery, and was to assume even more explosive forms by the end of the decade.

There was a huge inflow of foreign investment into Germany from 1924—a total of $7 billion over six years. But a large portion of it was used to finance mergers rather than carry out the modernisation of German industry.

For a time, the recycling system set in motion by the Dawes Plan, whereby surplus investment capital flowed out from the United States into Germany and then back to the US in the form of loan repayments, financed by German reparations, appeared to work. Germany imported around 28 billion RM in the period 1924-1930, out of which she paid reparations of 10.3 billion RM. So long as the inflow of capital continued, the system ran smoothly.

However, by 1928-1929 American investment started to fall, prompting a withdrawal of short-term funds. While the withdrawal of funds was the immediate cause of the financial crisis which engulfed Germany from 1929 onwards, the entire financial system was inherently unstable. As one analysis, written in 1932, put it: “Even if the world depression had not begun at the end of 1929 and international lending had not suddenly decreased almost to vanishing point, it was inconceivable that new loans could have continued to exceed the rising reparation and Allied debt instalments, plus interest charges on the vast volume of private indebtedness that had already been created.” [32]

The inherently unstable financial situation was rooted in fundamental problems of the German and European economies as a whole. As all historians of this period have noted, the vast bulk of the capital inflow into Germany was not used to modernize and expand industry, but was employed in the financing of government activities and projects. That is, the loans were not invested in productive capital.

German industry, which had been a global leader in the pre-war period of capitalist upswing, was now being eclipsed in the struggle for world markets. German exports declined markedly in the first half of the 1920s. Economic recovery in general was slow. It was only by 1925 that Europe returned to the levels of production that had been attained in 1913. It has been calculated that had the European economy continued to grow at its pre-war rate, the production levels attained in 1929 would have been reached in 1921. Such was the extent of the overall downswing in the European economy.

In Germany, the net domestic product had risen to just 103 percent of its 1913 level by 1928. Exports, however, were still at 86 percent of their 1913 values. In the period 1910-1913, the ratio of exports to national income was 17.5 percent. In the years 1924-1924 it fell to 14.9 per cent. [33]

As Germany and the other European powers declined, so the United States rose. By 1923 it had become the world’s greatest exporter and the second largest importer. Between 1926 and 1929 its share of world industrial production was 42.2 percent, compared to 35.8 percent in 1913. The importance of its investment outflows for the stability of the European and world economy can be gauged from the following figures. Between 1919 and 1929 the long-term foreign investment holdings of the United States increased by $9 billion. In 1929 American investments were two thirds of all new investment in the world. American foreign holdings rose to $15.4 billion, of which $7.8 billion were portfolio investments and $7.6 billion were direct investments.

The secret of US expansion was not hard to discern. It was to be found in the new production methods of American industry which, with the development of the assembly-line system, had brought about a vast increase in the productivity of labour and the extraction of surplus value.

The financial stabilization which followed the Dawes Plan, and the deflationary environment it created, sparked an intense discussion in German political, academic and industrial circles over the need for the rationalization and modernization of the German industry. No longer was it possible to accumulate profits simply through the process of inflation. Now the road to increased profits lay through higher productivity, rationalization and cost reduction.

In her valuable study of this process, the historian Mary Nolan sums up the impact of American industry as follows: “It was America’s industrial heartland that fascinated Germans, or rather the heartland of the second industrial revolution of iron, steel and machine making. This was ‘the technology of girders and gears,’ a world of continuous production and component parts, staggering productivity, and a minutely subdivided labour process. Its most visible symbols were Ford’s Highland Park and River Rouge factories and the Model T, but it also included the vast iron and steel works that stretched from western Pennsylvania, through Ohio and Indiana, and into Chicago. This was the successful American counterpart of Germany’s large, labour-intensive and crisis-ridden heavy industry sector, which was at the centre of the Weimar rationalization movement....

“The sheer size of Ford’s Highland Park and River Rouge plants awed German visitors. Highland Park, which was opened in 1910-1911 and introduced the assembly line in 1912-1913, encompassed over 50 acres and employed over 68,000 workers by 1924. And that was Ford’s old plant! River Rouge, begun in 1916 and completed a decade later, had 160 acres of floor space spread over 93 buildings. There were 27 miles of conveyor belts and over 75,000 employees... Even more impressive to German visitors than the scale of production was its innovative character. In the Ford works everything was subordinated to the principle of the efficient and inexpensive production of one standardized product, rather than a multiplicity of different goods. Individual parts were simplified and standardized to a degree that aroused the envy of Germans, who saw norms as the essential prerequisite for successful rationalization at home. Instead of universal machines that could perform many tasks, the Ford works were filled with specialized machines, tailored to the production of one particular standardized part and served by a worker who performed only one task.” [34]

The trade union and social democratic party leaders were no less enthusiastic about the introduction of American methods. They hailed Ford’s methods as creating the possibility for reforming capitalism and resolving the social question. In September 1925 the General Confederation of German Trade Unions (ADGB) sent a delegation of 14 to the United States, which produced a report, authored by four of them, hailing the new system as providing the possibility for the restructuring of capitalism in the interests of the working class. The report claimed that “the central problem of the European economy is and will remain increasing mass purchasing power.... Thus it is completely clear that the trade union struggle to increase wages is not only a social necessity but also a task upon whose accomplishment the further development of the whole economy depends.” [35]

This assessment was based on a complete misreading of the new system of production, in line with the thinking of Henry Ford himself, who sometimes claimed that the payment of higher wages created the mass market for cars and other consumer goods. In fact, the essence of the new system was not that it paid higher wages, but that it extracted greater profits, providing the basis for new investment and further economic expansion.

Despite the great enthusiasm for American methods, Fordism, as it was becoming known, did not take root in Germany. The reason is to be found in the profound differences in the situation confronting American and German capitalism.

The American system of production was the outcome of a veritable second industrial revolution which had its origins in the years immediately following the Civil War. The securing of the Union, through the victory of the northern industrial bourgeoisie, and the creation of a national market established the framework for the system of mass production that was to develop over the next five decades, culminating in the development of the assembly line in the auto industry and the production of mass consumption goods. Profits were made from capital intensive production methods in which economies of scale enabled the lowering of costs.

American capitalism was able to spread across a whole continent, with a vast internal market created through the development of the railway system and a common system of laws. German capitalism could not follow this path. On every side it was hemmed in by the barriers and borders of the European nation-state system—a system of constrictions which worsened after the Versailles Treaty. Whereas in America the concentration of capital took place through the establishment of large-scale enterprises, producing at low cost, in Germany and Europe in general the restrictions of the market led to the formation of cartels, through which profits were extracted by the restriction of production and the maintenance of high prices.

The German cartel movement had begun in the 1890s following the rapid industrial expansion of the previous 20 years, and was a feature of all sections of industry in the 1920s. Meanwhile, the constrictions on the market had become even more severe.

German industrialisation had received its initial impetus from the Zollverein in the 1830s, leading eventually to unification of the German states under Bismarck. But now, even a customs union with Austria was banned under the Versailles Treaty, lest an expanded German economy draw the economies of eastern and southeastern Europe into its orbit and weaken the position of France.

These restrictions meant that the German modernisation movement of the 1920s was based on mergers and the formation of cartels, combined with rationalisation of the workforce rather than the expansion of production. Rather than development of mass production for an expanding market, German modernisation involved further cartelisation, restriction of production and the maintenance of higher costs.

While German rationalisation involved the closing of the most inefficient factories and the restructuring of others, it never amounted to the “new industrial revolution” that was hailed by some observers. “The reality of German industrial restructuring was more limited, contradictory, and, for all concerned, unsatisfactory than such sweeping statements implied. Between the stabilization crisis and the world economic depression, only a few years and relatively limited capital were available to modernize Weimar’s ailing economy, and actual deeds could not match the outpouring of words about rationalization. The transformations within a given branch of industry were highly uneven, and many ambitious, multi-year projects for modernization slowed or stalled completely as the economic crisis began in 1929.” [36]

There is a vast difference between rationalization carried out on the basis of existing methods of production and the development of new systems and processes. Rationalisation on the basis of an existing system, through greater exploitation and cuts in the labour force, increases the productivity of labour and improves the profit position of the individual firm by lowering its costs. But it does not lead to an expansion in the overall mass of surplus value throughout the economy.

The significance of the American system was that it did bring such an expansion, not through restrictive practices and higher prices but through mass production at lower cost. In Europe, the constrictions of the nation-state system made such methods impossible in the 1920s. Consequently, businesses sought to maintain their profits through production restrictions which kept prices high, meaning that the rationalization process in Europe was “only a stunted offspring of the American productive vision as originally conceived.” [37]

The influx of loans from the United States did, however, enable the European economy to grow somewhat in the second half of the 1920s. Taking 1920 as the base of 100, European industrial production had risen to 123.1 by 1929, agriculture to 122.2. But growth never became self-sustaining. Unemployment in Germany fell to 7 percent in 1925, rose to 18 percent in 1926, then fell to 8 and 9 percent until the final months of 1928, then started rising without stopping until the spring of 1933.

The flood of capital into Germany in the wake of the Dawes Plan did not bring about a restructuring of the German economy, but it did make it more vulnerable to American capital flows, under conditions where these flows were becoming increasingly unstable. With the start of the stock market boom, investment capital, which was increasingly of a short-term nature, looked to domestic outlets for a quick return. In 1927 there was sharp decline in the levels of foreign investment in eastern Europe, and the following year the inflow of capital into Germany dropped as well. In the years 1927 and 1928, the investment inflow into Europe was $1.7 billion; in 1929 it dropped to $1 billion. This was at a time when increasing inflows were needed to cover the interest payments on past loans.

None of the contradictions of the European capitalist economy and the nation-state system, which had given rise to the war, had been overcome. Rather, they had intensified. There were deflationary tendencies in both industrial and primary producing countries, excess capacity in all sections of industry, increased tariffs and financial problems arising from war reparations and debts, coupled with increasingly unstable banking systems.

All these problems were exacerbated as the orgy of speculation on Wall Street led to the drying up of the inflow of finance to Europe. When the share market collapse came in 1929, it was not so much the cause of the Great Depression as the catalyst which set the catastrophe in motion.

The Dawes Plan brought about a certain restabilization of European and world capitalism. But it did not establish a new equilibrium. To return to the framework of Trotsky’s analysis at the Third Congress, it did not create the conditions for a new upswing in the curve of capitalist development.

What would that have required? Above all, the development and spread of new methods of production which could advance the accumulation of surplus value and restore the profit rate. To be sure, such methods had been developed in the United States.

However, that was not sufficient. American capitalism could no longer advance on the basis of a single continent. Its continued expansion was bound up with the growth of the world economy, and, above all, Europe. For, as Marx had put it: “The surplus value created at one point requires the creation of surplus value at another point, for which it may be exchanged...” [38] The development of more productive methods in Europe, however, was blocked by the constrictions of the nation-state system. In other words, the contradictions which had led to the war had not been overcome but were assuming even more malignant forms.

The socialist revolution did not spread after the successful conquest of power in October 1917, and for that mankind would pay a terrible price. The reason for the isolation lay not in the objective strength of the capitalist economy, as Harding maintains, but in the role played by the social democratic leaderships of the working class. Let us consider Harding’s positions from this standpoint.

The eruption of the war had exposed an excruciating crisis in the workers’ movement—the parties and organizations which the working class had constructed in an earlier period in order to organise its struggle against capitalism, and transform society itself, had themselves become the central mechanism through which the working class was chained to the decaying capitalist order. How was this problem to be resolved?

Let us suppose that the Bolsheviks had renounced the struggle for power in Russia. The result would certainly have been some sort of military-fascist regime. While various possibilities were contained in the situation, the variant which can be definitely ruled out is the establishment of some sort of bourgeois democracy. Indeed, the bourgeois democrats, and their supporters, the Mensheviks and Social Revolutionaries, had taken the reins of power in the period from February to May. Within a few months, having proved incapable of meeting any of the demands of the revolutionary movement, they were opening the door for the imposition of a military dictatorship.

So much for the situation in Russia. The international picture shows the same trends. Had the Bolsheviks not taken power, then the grip of social democracy would have strengthened. Those revolutionary elements seeking a way forward following the betrayals of the social democratic leaders would have been pushed back. This situation would have led to the imposition of dictatorial forms of rule.

If the Bolsheviks can be said to have “gambled” on the spread of the socialist revolution, then the social democracy most definitely gambled on the maintenance of bourgeois democracy and the return of pre-war conditions of capitalist growth and expansion, which would have enabled them to pursue a program of social reform. But bourgeois democracy proved to have no greater strength in the rest of Europe than it did in Russia—its decomposition merely took a little longer. And rather than experiencing a new upswing, world capitalism plunged into its deepest economic crisis ever.

In Germany, there was no more fervent advocate of bourgeois democracy than the Social Democratic Party (SPD). They even mobilised the armed forces of the state to hunt down its opponents on the left. The SPD, whether in government or out of it, was the foundation of every parliamentary regime during the period of the Weimar Republic. And even when the SPD was unceremoniously removed from office in Prussia in the coup of July 20, 1932, it demonstrated its unswerving loyalty to the state by submitting its objections of the Constitutional Court.

The social democrats gambled on bourgeois democracy and the stability of capitalism. The result of their gamble was military dictatorship and fascism throughout Europe. Their gamble failed precisely because the objective contradictions of the world capitalist economy, whose existence had been recognised and acted upon by the Bolsheviks, deepened and intensified.

Concluded

Notes:
[32] Moulton, op. cit., p. 91.
[33] See Gilbert Ziebura, World Economy and World Politics (New York, Berg, 1990), p. 69.
[34] See Mary Nolan, Visions of Modernity (Oxford, Oxford University Press, 1994), pp. 27-36.
[35] Nolan, op. cit., pp. 67-68.
[36] Nolan, op. cit., p. 132.
[37] Charles. S. Maier, In Search of Stability (Cambridge, Cambridge University Press, 1987), p. 51.
[38] Marx, The Grundrisse, p. 407.

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