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Great Depression to deep recession: The political context of economic crises

John Samuel compares the Great Depression of the inter-war years and the current global economic crisis to show the connection between economic crises, political turmoil and possible shifts in governance

Politics and economics are twins, shaped and driven by power relations. A financial crisis does not happen in a political vacuum. Politics and policy choices often shape, make and break economies and the financial architecture. So, it is important to unpack the political contexts, causes and consequences of financial and economic crises. And when we do so, we often find a clear connection between war, economic crisis and political transitions.  

In spite of the confident rhetoric of political leaders, a country’s economy does not necessarily dance to their tune. In early-2007, American President George Bush Jr boasted that “the economy is powerful, productive and prosperous”. It would be worthwhile to compare this with the message of an earlier president, Calvin Coolidge, to Congress on December 4, 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 October 29, 1929, the great crash of the New York Stock Exchange ushered in arguably the most traumatic decade in the history of capitalism. The near universality of this economic crisis and its political implications makes it hard to forget. 

The political contexts of the Great Depression and the current financial crisis are not the same. However, there is one shared context -- concentration of wealth in the hands of a few and consequent increase in inequality. The prosperity of the USA in the 1920s was very fragile: 5% cent of the population received more than one-third of the income and 70% of the population got an annual wage that barely allowed them to survive.

The present financial crisis is a result of the cumulative impact of the neo-liberal economic paradigm and unbridled financial capitalism in the last 20 years. The globalisation of market, media, technology, and finance went hand in hand with the globalisation of discontent and the globalisation of terror. They fed into each other with increasing virulence. Thus, economic growth was accompanied by inequality, injustice and reactionary politics. George Bush and Osama Bin Laden fed into each other. The rise of neo-liberal capitalism -- driven by hyper-consumerism and economic growth --perpetuated a new addiction for oil.  

The oil addiction shifted the theatre of international politics to West Asia and the Gulf countries. Powerful countries sought to control oil and other natural resources through the power apparatus of the military and the markets. This created new forms of imperialism and militarism. The new oil economy irrigated markets, war machines, as well as terrorism. Though the Gulf War in the early-1990s proved to be a profitable enterprise for the USA, the war against Iraq starting in 2003 has proved to be a lost game in terms of economics and politics. The USA’s economic and military resources were overstretched and became increasingly brittle. In spite of President Bush’s boasts to the contrary, the economy began to bleed paying for this costly war. It was estimated that around US$ 3 trillion was used to blow up Iraq, killing thousands of Iraqis and inflicting deep wounds on the peoples and economies of the world. The combined consequences of military adventurism and casino-capitalism eventually shook the political power of the White House and the economic muscle of Wall Street.  

The context of the Great Depression in the 1930s needs to be located in the economic and political order in the inter-war years. The crash of the New York Stock Exchange on October 29, 1929 led to a deeper universal crisis which, at the time, looked like it would lead to the collapse of the capitalist world economy. However, this was also the time when communism was 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 economy.  

The economic and political consequences of the First World War were 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 US emerged as an important player in the aftermath of the First World War, it was neither a unilateral superpower nor was the dollar the super currency of the world. Capitalism was far less globalised than it is today and the political economy of oil was still in its early stages. The world was still a big colony of the British and European powers.   

Today, the context has changed dramatically. It is an irony of history that the USA blew up lots of money on the war in the Gulf and Iraq, and now will have to depend on money and oil from the very same Arab world. The USA has to depend on the trillions in foreign exchange reserves from the Gulf countries and Asian countries such as China, Japan and India. Many of the top banks and businesses in the West are owned by Arabs through investments as well as the strategic use of the National Sovereign Funds of many Gulf countries. While markets in Europe and the USA got increasingly saturated, the power shifted to vibrant markets in the 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. Industrial production in the US and Germany fell about a third between 1929 and 1931. There was a slump in the demand and price of primary commodities including rice, tea, coffee, wheat and silk. Many Asian, African and Latin American countries dependent on the export of primary commodities suffered due to the slump in demand. World trade fell by 60%. The crisis resulted in massive unemployment of between 20% and 50% in different countries. The failure of banks and the credit crunch actually 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 in the USA had failed. Automobile production -- a key sector of the US economy – was halved in just two years. The combined output of the world’s seven economies declined around 20% within three years, between 1929 and 1932. Millions lost their jobs and unemployment in the USA and Germany was above 33%. The depression caused a sharp increase in tariffs and resultant reduction in international trade. World trade almost collapsed; in fact, Great Britain, the original imperialist master of “free trade”, abandoned free trade in 1931. 

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

The economic crisis in Germany was exacerbated by the war reparations the country had to pay in the aftermath of the First World War. These vast and undefined ‘reparations’ were demanded as the cost of war and the damage done to the victorious powers and were imposed on Germany by the Versailles Peace Conference in 1919. John Maynard Keynes, who participated in the Versailles Peace Conference as a young economist in the British delegation, warned against the reparations in an illuminating paper titled ‘The Economic Consequence of Peace’ (1920). But his arguments were ignored by the political leaders of the day. As Germany plunged into an economic crisis, the nationalist rhetoric of Hitler and Nazism found increasing popular support.  

There is thus a connection between economic crises, political turmoil and possible shifts in governance. Germany was indeed a major industrial power and when the crisis in Germany was followed by the crash of the US economy there was much more impact economically and politically. Though it gave rise to fascism in many parts of Europe, 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 demand. The first New Deal Programme (1933-35) sought to restore public confidence and resulted in a series of legislations and policy measures. The second phase of the New Deal began in 1935 and included path-breaking social legislations such as the Social Security Act (a scheme for unemployment insurance, disability insurance and old age pension), 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 employment created for 8 million workers in the USA. The New Deal signified the role of the State in 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 initiated far-reaching and stunning socio-economic reforms and established the role of an interventionist State. Thus began the political legitimacy for the Welfare State across the world. 

The current financial crisis may lead to a deep recession. Such a shift is powerful enough to shape new paradigms of policy, development and institutional framework in the next five years. The Great Depression was the beginning of a paradigm shift in the policy, politics and nature of the State. The political outcome of this financial crisis may be too early to predict. But one can expect multiple shifts in the political process and governance in the years to come. 

The ongoing financial recession has played a very important role in shifting the politics of the USA. It remains to be seen whether the team of President-elect Barack Obama can turn the tide of politics and economics. There is indeed a danger of conformist politics with a high dose of optimistic rhetoric. A black man in the White House may be a great political symbol. But whether it will transform the politics and economics of the world remains a billon-dollar question.     

InfoChange News & Features, December 2008