Although the ‘American Dream’ became a reality for millions in the 1920s, it was built on shaky grounds – the huge speculative bubble that was building up on Wall Street was waiting to collapse

The post-war wave of struggle and radicalisation was short in the US. From 1920, the economy boomed and new culture of individualism took hold.

By 1928, US output was double the level of 1914. Economists announced that capitalism’s ‘childhood diseases’ were in the past and that ‘the economic condition of the world seems on the verge of a great forward movement’.

The US market was flooded with consumer goods that had previously been available only to a small minority. Ordinary homes were supplied with electric power. Middle-class families acquired telephones, radios, gramophones, vacuum-cleaners, and refrigerators. Millions went to the cinema each week. Cars ceased to be a luxury and became mass-market commodities.

The ‘American Dream’ became a reality for millions. ‘Everybody ought to be rich,’ announced John J Raskob, director of General Motors and chair of the Democratic Party’s National Committee. Many ordinary Americans agreed.

Europe was slower into ‘the Roaring Twenties’. The economic impact of the war, the social dislocation, the great upsurge of revolution, had all been far more powerful in Europe than in the States. But after 1923, Europeans also entered ‘the Jazz Age’.

The Dawes Plan (a flow of US loans) revived German capitalism and laid the basis for the relative stability of the Weimar Republic in the later 1920s. Britain commenced a third industrial revolution, with new industries like autos, aircraft, and consumer goods developing in the Midlands and the South-East, and new suburbs being built around the old urban centres.

As in the States, the re-stabilisation of capitalism prompted starry-eyed predictions of everlasting prosperity and harmony. ‘Our economy is sound,’ proclaimed Germany’s Social-Democratic Chancellor Hermann Müller in 1928, ‘our system of social welfare is sound, and you will see that the Communists as well as the Nazis will be absorbed by the traditional parties.’

Leading German economists agreed: ‘There has been a clear tendency in European economic life for antagonistic tendencies to balance each other, to grow less, and finally to disappear.’

But the contradictions of capitalism had not been abolished. Equally significant – though far less remarked upon – were the clear limits to the economic recovery.

State arms-expenditure had sustained the world economy in the run up to and during the First World War. It was the pre-war arms race, indeed, that had ended the Long Depression of 1873-1896 (MHW 61). The signs had been there in the late 19^th century that the system had a fatal addiction to guns.

Arms spending was suddenly cut to a fraction of wartime levels after 1918. The result was mass unemployment. The system proved incapable of an orderly resumption of civilian production. The market turned out not to be ‘self-regulating’.

Growth remained patchy and modest throughout the Twenties. For every success, there was a failure. Unemployment never fell below one million in Britain in the interwar years. Wage cuts in the pits provoked a six-month miners’ strike and a nine-day General Strike in 1926. War reparations prostrated the German economy in the early 1920s, and hyperinflation wiped out the value of savings in 1923.

The French economy was buoyed up by German war reparations, the US economy by war-loan repayments and a policy of ‘easy money’ (cheap credit due to low interest rates). It was this that enabled the US economy to boom for a decade. Some capitalists were ‘roaring’ only because others were squealing.

The American Dream was, in fact, a will-o’-the-wisp. A central contradiction of capitalism is that it imposes low wages in the workplace, but requires high spending in the marketplace.

You cannot have both. The one involves squeezing wages to reduce costs and raise profits. But then workers cannot afford to buy back the goods that their collective labour has produced.

But if wages are raised and profits cut, capitalists have no incentive to invest. The search for profit powers the system.

In America’s Roaring Twenties, farm incomes were depressed and wages did not rise. Demand in the ‘real economy’ was therefore depressed. Industrial investment was in consequence too sluggish to absorb the surplus capital with which the system was awash.

So it flowed into speculation. Specifically, it fed a self-sustaining speculative bubble on the Wall Street Stock Exchange.

F Scott Fitzgerald’s The Great Gatsby (1926) captures the hollowness of Twenties America. The pointlessness of the lives of its characters – grotesquely rich members of the US bourgeoisie – mirrors their absence of social function. The empty minds and endless round of self-indulgence reflects the bubble-economy of financial parasitism.

Financial bubbles are as old as capitalism. There was a bubble of speculation in tulip production in early 17th century Holland (‘Tulipmania’) and a bubble of speculation in colonial investment in early 18th century England (‘the South Sea Bubble’). The Long Depression of 1873-1896 had begun with a financial crash following a speculative boom.

The way a bubble works is simple. If demand for a paper asset is high enough, its price will rise. If the price of an asset is rising, more investors will want to buy it, hoping to profit from further rises when they re-sell.

If there is enough surplus capital around, and if paper assets keep rising in price because of high demand, take-off becomes possible: assets continue to rise in price simply because more and more investors want to buy them – irrespective of the relationship between their price and the actual value of the goods or services represented.

Paper assets are essentially loans of money in return for titles to ownership. They can be corporate shares, government bonds, insurance policies, currency holdings, bundles of mortgages, advance purchases of commodities, and many other things. The ‘financial services industry’ is very inventive in this respect.

The ‘normal’ return on capital is a share in the profits of the real economy. A ‘speculative’ return arises when the link between the price of paper assets and the value of actual commodities has broken down. Price rises become self-sustaining and stratospheric in a frenzy of ‘get rich quick’ buying and selling.

Global debt increased by about 50% during the 1920s. This is one measure of the creation of ‘fictitious capital’. Whole new classes of ‘holding companies’ and ‘investment trusts’ were created.

These companies produced nothing. They simply traded in the stock of other companies. Often enough, the companies they invested in would be other holding companies and investment trusts. Sometimes the layers of fictitious capital could be five or ten deep.

The Goldman Sachs Trading Corporation was an example. It was formed on 4 December 1928. It issued an initial $100 million of stock, 90% of it sold direct to the general public. With this initial capital, it invested in the stock of other companies.

In February 1929, Goldman Sachs merged with another investment trust. Assets were now valued at $235 million. In July, the joint enterprise launched the Shenandoah Corporation. When it offered $102 million of stock for sale, the issue was oversubscribed sevenfold. No-one wanted to miss out on the money-for-nothing miracle that was Goldman Sachs. The company duly obliged and issued yet more stock.

As the frenzy mounted, capital was sucked out of foreign loans, industrial investment, and infrastructure projects. Nothing was as profitable as speculation on Wall Street. Loose money and a weak economy gave rise to a massive imbalance between the price of paper assets and the value of real commodities.

The bubble was a trap. Some observers tried to sound a warning. ‘Sooner or later a crash is coming,’ declared Roger Babson to the Annual National Business Conference on 5 September 1929, ‘and it may be terrific.’

But party-poopers were not welcome. A lot of very rich people had staked a fortune on making themselves much richer. They were right behind US President Calvin Coolidge’s upbeat State of the Union Address the previous December.

‘No Congress of the United States ever assembled,’ intoned the President, ‘… has met with a more pleasing prospect than that which appears at the present time … there is tranquillity and contentment … and the highest record of years of prosperity.’

When, a short while later, the Stock Market got the jitters, Secretary of the Treasury Andrew Mellon was quick to reassure: ‘There is no cause for worry. The high tide of prosperity will continue.’

The Wall Street Journal was also keen to dispel investor anxieties: ‘price movements in the main body of stocks yesterday continued to display the characteristics of a major advance temporarily halted for technical readjustment’.

On Thursday 24 October 1929, the Wall Street Stock Market crashed. The financial collapse pitched the world into the Great Depression and triggered the sequence of events which led to Stalingrad, Auschwitz, and Hiroshima. The greatest tragedy in human history was about to unfold.