Neil Faulkner argues that history supplies an important reason to fight the cuts being proposed today – in the 1930s, deflationary cuts deepened and sustained the Great Depression.

Media babble about a ‘double-dip recession’ obscures a deeper economic reality. There is a difference between a cyclical recession and a period of slump.

The business cycle is a constant of capitalist development. In a rationally managed economy, we would draw up a plan designed to match needs, resources, and production. If we did this, there would be no business cycle. Instead, there would be steady economic development.

But capitalism does not work that way. The economy is fragmented into numerous competing units of capital. During a boom, everyone invests, takes on staff, and increases production. The expansion is not regulated by a plan, but driven by competition and profit. No-one wants to miss out, so everyone piles in.

Then there is a crash. Suddenly, there are too many houses being built, too many cars coming off assembly-lines, or too many edge-of-town hypermarkets all selling the same stuff. Prices collapse, businesses go bust, and workers lose their jobs.

The downturn clears the ‘overheated’ market-place. The businesses that survive can buy up plant at knock-down prices, take on unemployed workers willing to accept low wages, and move into the markets of bankrupt firms. A new phase of expansion begins.

It is not rational or necessary, but it is the way capitalism works – because it is based on profit not need, competition not planning.

The business cycle, in one form or another, is always operative. The rhythm of ‘boom and bust’ is like the breathing of the system.

But what of the general health of the system within which the business cycle operates? In some periods, upturns are strong and sustained, downturns shallow and short-lived. In other periods, the upturns are too weak to soak up unemployment, while the downturns are long and severe.

The period 1945-1973 – ‘the Great Boom’ – was an example of the former. But this is not the norm. Far more common over the last 135 years have been periods of either stagnation-slump or, at best, shallow booms.

The neoliberal era from the mid-1980s to the credit crunch of 2007 was an example of a shallow boom. Growth rates were barely half that of the Great Boom, public services deteriorated, social inequality increased, and underlying unemployment remained relatively high. But it was, overall, a boom of sorts.

Before 2007, there have been three long periods of depression in the history of capitalism. The Long Depression of 1873-1896 was patchy but protracted. Overall, it was a long period of slower growth, punctuated by crashes and severe recessions. ‘Both new and old industrial economies ran into problems of markets and profit margins,’ explains historian Eric Hobsbawm. ‘As the titanic profits of the industrial pioneers declined, businessmen searched anxiously for a way out.’

Intensified competition led to protectionism, cartels, imperialism, and an arms race. It was the development of what has been called ‘monopoly-finance capitalism’ that underlay the tensions between rival national-capitalist blocs that exploded in the First World War.

The world economy remained sluggish in the 1920s – unemployment never fell below one million in Britain during the interwar years. But growing wealth at the top fuelled a speculative frenzy which culminated in the 1929 Wall Street Crash. This plunged the world into the Great Depression (1929-1939).

The value of world trade collapsed to a third of the 1929 figure. Unemployment leapt from 10 million worldwide to 40 million by 1932. In that year, one in three workers in the US and Germany were jobless.

What made the Great Depression so disastrous were the policies pursued by world leaders. Drastic cuts were not the immediate response to the Great Crash. But the economic orthodoxy was ‘sound money’ and ‘balanced budgets’, and when the global economy nosedived in 1931, politicians panicked.

In Germany, with one in four workers already unemployed, Chancellor Br√ºning deflated further by imposing massive wage cuts and tax rises. In the US, President Hoover denounced programmes for large-scale spending, and was soon lecturing his successor-elect, Franklin D Roosevelt, on the virtues of what would today be called ‘deficit cutting’.

In Britain, a minority Labour Government elected in 1929 was under siege by finance-capital. As unemployment soared, dole payments were to be cut to satisfy ‘the vital need for securing budget equilibrium’.

One cabinet minister later recalled: ‘One of the memories that abides with me … is that of 20 men and one woman, representing the government of the country, standing one black Sunday evening in the Downing Street garden awaiting a cable from New York as to whether the pound was to be saved or not, and whether the condition would be insisted upon that the unemployed [rate] would be cut [by] 10%.’

The condition was insisted upon. The bankers wanted the impoverishment of the unemployed as a token of the Labour Government’s total submission. They also wanted unanimity: the whole cabinet was to vote it through. Otherwise the Government was to resign.

‘So it is the financiers, British and American, who will settle the personnel and the policy of the British Government,’ wrote leading Fabian socialist Beatrice Webb in her diary. ‘The dictatorship of the capitalist class with a vengeance!’

The cabinet split. The government resigned. Former Labour Prime Minister Ramsay MacDonald then headed up a reactionary, deficit-cutting ‘National Government’.
Protectionism and deflation locked the world into a decade of economic slump and mass impoverishment during the 1930s. Hitler was the political victor in Germany.

The Second World War was the final outcome. And it was only then, when war production took off, that the Great Depression ended.

So history supplies a fourth reason to fight. In the 1930s, deflationary cuts deepened and sustained the Great Depression.