Part 1: The Crash

“Those who do not learn from history are doomed to repeat it.” Finding ourselves at the beginning of a new depression, interest in the last one has increased considerably. In this three-part study of the Great Depression, Alex Grant details the crash, the response of the ruling class, and how the workers fought back. Part one explains the conditions that led to 1929 and the processes that exacerbated the slump.
Watch part 1 of our video series

It has been said that those who do not learn from history are doomed to repeat it. The capitalist class has not learned the correct lessons from the Great Depression and now they are repeating it. Finding ourselves at the beginning of a new depression, it is unsurprising that interest in the last one has increased considerably. Our task as Marxists is to learn the lessons of 1929-39 so we can find a way out of the present capitalist crisis. 

The 1929 crash came at the end of a decade of speculative boom. Capitalism had managed to stabilize itself after surviving the First World War, a wave of revolutions, and the slump of 1920. The “Roaring Twenties” represented the last hurrah of a system heading over the cliff. All the actions the bourgeoisie took to survive the previous crisis served to exacerbate the conditions in the following crisis.

What is notable during this period of “boom” is how it was accompanied by a massive increase in inequality and speculation. Over the decade, the income share of the top 1% of Americans increased from approximately 15% to 25%. In 1929, the top 0.1% in the USA amassed 25% of all wealth. Both of these statistics fell back to about 10% in the 1960s and ’70s, only to return to similar heights in the recent period. 


The inflation of stock values formed a significant part of this increase in inequality. In his classic The Great Crash, liberal economist John Kenneth Galbraith detailed how traders managed to game the system. A property bubble developed where a speculator could purchase a plot of land with only a 10% down payment, with the promise of providing the other 90% at a later date. However, our profiteer has no intention of waiting for this later date. Instead he planned on selling the land at a higher price on a rising market. There was a similar bubble-producing process on the stock market. This was known as buying “on margin”. Instead of buying a stock outright, a trader could purchase it for a 10% payment with the other 90% being borrowed from a broker. These processes allowed profiteers to access ten times the capital normally available. Various banks and finance houses were more than happy to get their cut of the action. This is all well and good when prices are rising. People buy, and that in turn leads to increased prices, which in turn causes more people to buy! A classic bubble is formed. At its height, $8.5 billion of margin loans were sloshing around the U.S. economy. This amounted to 8% of U.S. GDP and was more than the entire value of currency in circulation.

Another trick was the formation of “investment trust” corporations. These entities produced no tangible products. Instead, with a relatively small amount of seed capital, they invested in other companies. However, there was nothing to stop investment trusts from investing in other investment trusts in a circular process of creating value from nothing. Galbraith likened this to a pyramid scheme. He detailed how Goldman Sachs founded the Goldman Sachs Trading Corporation (GSTC). GSTC in turn created the Shenandoah investment trust, which then created the Blue Ridge investment trust. They all invested in each other, which caused their stock value to increase, which increased the value of their holdings, which fed back again to boost their stock price! This was an extreme example of the phenomenon of double accounting that Marx labelled as fictitious capital. However, instead of the value of a real commodity being represented first in itself, and second in a stock, here we have ten or twenty degrees of abstraction from anything that could be considered real material wealth and production. In 1929 Goldman Sachs Trading Corporation sold for 222 cents per share. After the crash, when everything fictitious was squeezed out of the market, GSTC sold for under two cents.

The British Marxist Ted Grant, who knew a little about betting on horses, was fond of quoting from The Great Crash, which said that the stock market is kind of like a horse race—with one important difference. At the races, one horse wins and all the other horses lose. However, in the stock market, all the horses win… until all the horses lose. Those buying on margin were totally uninterested in production. They were attempting to live the ultimate capitalist dream of creating money from money, without all the headaches of actually having to employ workers or do anything useful. Eventually this house of cards came crashing down. 

The Great Crash

There is this idea that the stock market is totally divorced from the real economy. It is not helped by the fact that the inhabitants of Wall Street deliberately use an arcane language that is intentionally unintelligible to ordinary human beings. Sometimes one gets the impression that they do not even understand these words themselves. In 1929 only 16% of the U.S. population participated in the stock market. This even led some socialists to cheer on the crash as bringing the swindlers down to earth and having nothing to do with working class people. They could not have been more wrong, as we shall see.

While the stock market is abstracted by several degrees from the real economy which produces cars, planes, and radios, there is still a very real link. It is not well known, but it was a slump in the real economy that triggered the Wall Street Crash, not the stock market that triggered the Great Depression. In August of 1929, more than two months prior to the crash, there was a slump in steel production and sales of cars and houses declined. Consumer debt had reached unsustainable levels while construction stagnated. Marx explained that in the final analysis, the cause of every capitalist crisis is overproduction. 

Bankers and politicians all repeated the same mantra, “the fundamentals of the economy are sound”, but they were not sound. In the space of a few weeks the Dow lost almost half of its value, going from a peak of 381.17 down to 198.60. Instead of making massive profits, all those who bought on margin could not sell their stocks quick enough. They did not have the money to pay the 90% owed. Mass bankruptcies ensued, and stories of stock market suicides abounded. 

Dialectically, cause had become effect, and effect had become cause. The recession had burst the stock market bubble, but the bubble in turn worsened the recession. However, it is impossible to explain the Great Depression purely on the basis of the crash. There have been other bubbles and other crashes in the history of capitalism, but they have not all led to a depression or even a recession. There is no way to explain how, on its own, a crash in October of 1929 resulted in a depression lasting all the way to 1933. If the fundamentals were in fact sound the real economy would have shrugged off the crash and continued on. Similarly, COVID-19 has triggered the current slump which has been in preparation for a long time. A healthy society could weather this storm, while a sick and decrepit society will be dragged down. COVID-19 has revealed all the underlying contradictions of today’s society just like the Wall Street Crash did in 1929.

Individual and corporate bankruptcies got transferred to the balance sheets of the banks. In 1929, 650 banks went under. By the end of 1933 more than 9,000 would go under. The stock market would recover somewhat in 1930, but still at a level 30% below its peak. But then a new slide began, until in 1932 the Dow bottomed out at 41.22, an 89% loss of value. Wall Street would not recover to its 1929 peak until 1954.

Year US GDP Unemployment Bank failures Inflation
1930$92B9%1350– 6.4%
1931$77B16%2294– 9.3%
1932$60B23%1700– 11%

The above table highlights the key indicators of the Great Depression. Over four years, U.S. GDP would contract by 45%. Fifteen million would be unemployed and 2 million would be homeless in a country with approximately half today’s population. Wages slumped by 60% and 30 million people were on some form of public or private support. Food riots broke out. Nothing like it had been seen before. If someone was writing this article in 2019 they could add, “or since”. But in 2020 it only took two months for most countries to reach Depression-era levels of unemployment, and we do not know what depths GDP will plunge to.

The ‘invisible hand’

The politicians and bankers of 1929 were all adherents of the philosophy of “laissez-faire”. This was the idea that the invisible hand of the market will decide all, and it is best for the state to stay well away from the economy. Wall Street was in fact a self-governed private association with next to no government regulation. If the market says a man is bankrupt, he is bankrupt. If the invisible hand shuts down banks, that is for the best. Mainstream capitalist economists, from John Maynard Keynes to Milton Friedman, believe that this was a huge mistake.

Banks do not keep all their deposits in reserve. They lend them out to others and gain a share of the unpaid labour of the working class via interest payments. Banks only keep approximately 5-10% of their holdings on hand in case their customers want to make a withdrawal. If more than 10% demand their money then the bank will fail. This is normally not a problem, except when people know that there is a possibility of banks going under. If you think that your bank might collapse the logical thing to do is to withdraw your money just in case you end up losing it. When everyone does this it leads to a wave of bank failures. 

The bank failures, plus the rich hoarding their wealth, led to a fall in the supply of money in circulation. The government did nothing to stop this, insisting on balanced budgets and laissez-faire policies. These policies, combined with a reduction in demand due to the slump, led to significant deflation. Deflation, the reduction of prices, is very problematic for capitalism. It means that the value of money is increasing. This causes people to stop spending, because if they wait then the thing they want to buy will be cheaper. Generalized this leads to a collapse of economic activity, leading to more deflation. It also means that debts are now more difficult to repay. A $100 debt, after 10% deflation, will now require the equivalent of $110 to repay (plus interest). 

The Keynesians and the monetarists both explain how the laissez-faire approach made the crash worse, but they propose slightly different solutions. The Keynesians propose bailing out the banks, while also providing some form of support to the working class. The followers of Milton Friedman on the other hand propose state handouts to the banks and austerity for the workers. This is what was implemented in the 2008 recession, and has been labelled “socialism for the rich, capitalism for the poor.” In the current crisis there have been trillions of dollars extended to the banks and big corporations to keep them afloat, with some support for workers in some countries. But the relative expenditure is five or 10 times weighted towards the banks. We should recognize that both the Keynesians and monetarists implicitly recognize that the “invisible hand” of the capitalist market does not work and capitalism needs state intervention to survive.


Another failure of the ruling class was their turn to protectionism. In 1930, U.S. President Herbert Hoover signed the Smoot-Hawley Tariff Act, which raised tariffs on a range of imports from approximately 40% to 60%. The idea behind such tariffs is to protect your home market and preserve domestic production and employment. Today, Donald Trump seems to be increasingly in favour of such protectionism. These measures are an attempt to export unemployment. If you are the only country implementing tariffs then it just might work. But the tendency is for every other nation to implement similar tariffs and spark off a trade war. 

Protectionism means buying a more expensive and less efficiently produced commodity from home rather than a cheaper and more efficiently produced item from abroad. Aggregated over the world economy this leads to a collapse in efficiency, and a reduction in wealth. You now get less wealth for more labour. 

As a result U.S. exports fell from $5.2 billion to $1.7 billion and global trade slumped by 65%. North of the border, similar protectionist measures were in preparation. The British Empire Economic Conference was held in Ottawa, with representation from the major Commonwealth nations. A policy of “Imperial Preference” was enacted on the principle of home producers first, empire second, and the rest of the world third. Canada enacted import tariffs on 30% of U.S. goods. But again, this did more harm than good. At the time, Canada was responsible for the production of 40% of the world’s wheat. Protectionism led the price of wheat to slump from $1.43 to $0.60 per bushel.

Today’s capitalists know very well the negative role of protectionism, but that does not mean it cannot return. Trade barriers and competitive devaluations played an important role in prolonging the slump throughout the 1930s. But all it takes is one country to break trade agreements and attempt to export its problems for there to be a tit-for-tat ramping up of economic nationalism. The present occupant of the White House seems to be a likely candidate to set off a new trade war. The bourgeoisie know exactly where such actions lead, but they may be powerless to stop them.

FDR’s ‘New Deal’

Franklin D. Roosevelt didn’t win election on the basis of a Keynesian New Deal. Instead he ran for office on the same balanced budget laissez-faire policies as Hoover. However, the banking crisis was coming to a head just as FDR was being sworn into office in March 1933. A whole series of states had declared bank holidays to prevent people from withdrawing their funds and bringing down the banks. 

Roosevelt closed down all the banks in the country on March 6 and passed the Emergency Banking Act three days later. The state gave 100% deposit insurance to the major banks, removing any of the risk which is supposed to be the justification of capitalist profit-making. They also shut down more than 4,000 of the most insolvent banks with $3.6 billion in deposits. This act appeared to stop the epidemic of bank failures and shored up the money supply. $1.1 billion of hoarded cash was subsequently returned to the banking system and re-entered into circulation. This helped to end the deflation crisis. The state subsequently stepped in to save capitalism again with the implementation of deposit insurance to stop bank runs.

Having shored up the banking system, the New Deal began providing support to the unemployed. $20 billion was expended in public works projects and 25 million Americans were put on relief. Productive infrastructure such as dams were built, but the military also got its cut and New Deal programs built warplanes, military bases, and warships, including two aircraft carriers.

This spending provided a temporary stimulus into the economy and led to a growth of GDP from 1934 to 1937. But this stimulus was merely a temporary fix, like a shot of adrenaline into a sick patient, and did not fundamentally alter the underlying contradictions. 

Trotsky explained that the New Deal was the mirror image of fascism:

“Two methods for saving historically doomed capitalism are today vying with each other in the world arena – fascism and the New Deal. Fascism bases its program on the demolition of labor organizations, on the destruction of social reforms, and on the complete annihilation of democratic rights, in order to forestall a resurrection of the proletariat’s class struggle…

“The policy of the New Deal, which tries to save imperialist democracy by way of sops to the labor and farmer aristocracy, is in its broad compass accessible only to the very wealthy nations, and so in that sense it is American policy par excellence…

“But the New Deal itself was possible only because of the tremendous wealth accumulated by past generations. Only a very rich nation could indulge itself in so extravagant a policy. But even such a nation cannot indefinitely go on living at the expense of past generations. The New Deal policy with its fictitious achievements and its very real increase in the national debt, leads unavoidably to ferocious capitalist reaction and a devastating explosion of imperialism. In other words, it is directed into the same channels as the policy of fascism.”

Countries with ruined economies after the First World War, such as Germany and Italy, had no reserves with which to face down the Depression. The ruling class in those countries gambled everything on civil war against the workers, a civil war that they were never guaranteed to win. But in the wealthier imperialist nations that had built up a layer of fat they could afford to forestall such a risky maneuver, although such actions could not be sustained perpetually. The fat would eventually be burned off and debts would have to be repaid, with interest. The return to slump in 1937, with GDP 10% lower than 1929 in dollar terms, showed that the New Deal merely put off the inevitable. Those who today propose new “New Deals” fail to understand that FDR only managed to give the economy a brief jolt before returning to crisis. In an interview with an American journalist Trotsky commented

“A program which wishes to maintain the foundations of capitalism untouched cannot offer a way out of the crisis… Mr. Roosevelt desires to ameliorate the situation of the toilers in so far as it is necessary to save the capitalist system. I see the only way out through liquidating it once and for all.”

Continued in part 2 | part 3