Industrial Cycles Since 1945


In August 1948, the U.S. producer price index peaked at 28.2. It reached a low of 25.9 in December 1949. This was a decline of a little more than 8 percent. Consumer prices also fell during this mildly deflationary recession. Prices were entering a long-term upward trend. Prices in terms of gold were well below the levels that prevailed at the end of the post-World War I inflation. Therefore, though the World War II war economy and its inflationary aftermath had driven up the general price level in terms of gold, it did not drive it up all the way to the levels that prevailed after World War I. It therefore is not surprising that the post-war price deflation in 1948-49 was much less than the price deflation of 1920-21.


The first real cyclical downturn in the global industrial cycle after World War II came in 1957-58. Compared to the downturns that had preceded World War II, the 1957-58 recession had one major new feature: prices kept rising right through the recession. This reflects the changed economic policies on the part of the governments and central banks in the wake of the super-crisis of 1929-33. As long as the cost of living kept rising, the majority of (bourgeois) economists and capitalist governments believed a major depression could not develop. Therefore, when the economic indicators began to decline sharply in the fall of 1957, the Federal Reserve System pumped huge amounts of reserves into the U.S. banking system, the Feds Fund rate was cut from 3.5% to 0.5%, and the federal government stepped up its spending—allowing a large deficit in order to increase effective monetary demand. Keynesian economics dominated. It appeared that Keynesian-inspired macro-economics had passed its first real test.

There does appear to have been some stimulation to gold production, since gold production finally rose above the the levels of the late Depression around this time. Even in the absence of price declines, the decline in the turnover of capital caused by the drop in sales lowered the rate of profit in most industries during the 1957-58 recession. But no such drop in turnover occurred in the gold industry. In addition in those years, the gold mining companies, located mostly in apartheid South Africa, were able to hold wages at very low levels. Sensing that the a rise in the dollar price of gold—or what comes to exactly the same thing, the devaluation of the dollar—was only a matter of time, they began to demand gold for some of their dollars. The U.S. faced the first major drain on its gold reserve since the super-crisis days of 1931-33. Only 14 years after the Bretton Woods agreement of 1944, the Bretton Woods international monetary system faced a serious crisis. From a low of under 0.5 percent in the summer of 1958, the fed funds rate rose to 4 percent by the winter of 1960. These rapid interest rate increases soon proved fatal to business by causing credit to freeze up. The result was a ‘double-dip’ recession.

The new President Kennedy rejected dollar devaluation and was determined to keep the dollar at $35 an ounce. The U.S. dollar would be supported not only by the credit and gold of the United States, it would be supported by credit and gold of its European satellite imperialist countries as well. This is the London Gold Pool, made up of the United States, Britain, West Germany, France, Switzerland, Italy, the Netherlands, and Luxembourg. Essentially, this meant that the dollar would now be backed not only by the gold in Fort Knox but also by the gold of Britain, West Germany, France and the other members of the gold pool. Or what comes to exactly the same thing, America said to its European imperialist satellites, from now on your gold reserves will be backing our currency. This is a good example of the nature of the “world order” that emerged from World War II!

The very success of the capitalist central banks and governments in limiting the effects of recessions meant that interest rates were ratcheting up. In a classic crisis, the rise in interest rates during the boom was offset by a similar fall in interest rates during the crisis and depression that followed. That is, the fall in interest rates during the recession reversed the rise in interest rates that occurred during booms. In this way, the rate of interest was kept below the rate of profit. Or what comes to exactly the same thing, it kept the profit of enterprise—the difference between the total profit defined as surplus value minus ground rent, and interest—positive. But after World War II, though interest rates continued to fall during recessions, they fell less during the recession than they rose during booms. This was a consequence of the very success of Keynesian polices in limiting the recessions. At first, the capitalist system could tolerate this, because thanks to the Great Depression the post-World War II period had started out with an exceptionally low rate of interest while the rate of profit rose sharply. But as interest rates kept rising more during booms than they fell in recessions, the profit of enterprise came under increasing pressure.

The falling rate of profit was is collision with the rising rate of interest. More profit goes in interest, and less in profits to industrial capitalists. Therefore there is less motivation for the production of surplus value.

One major factor working in the direction of prolonging the boom was South African apartheid. The conditions of apartheid made it impossible for the gold miners employed in the South African gold mining industry to obtain the full value of their labour power. As a result, it took a relatively long time before rising prices finally reduced the rate of profit sufficiently in the gold mining industry to begin to reduce total global gold production.

Starting in 1965, the industrial cycle entered the boom phase proper. The Kennedy-Johnson tax cut of 1964 combined with the rapid escalation the war against Vietnam resulted in U.S. producer price index surging to 3.5 percent in 1965. It is important to realize that the rise in prices in the mid-1960s was a rise in prices in terms of gold, not just dollars. These price rises did not reflect any depreciation of the U.S. dollar against gold.

In September 1966 the fed funds rate hit 6.13 percent, an extremely high level by pre-1968 standards. This abrupt tightening of the money market led to a sudden freeze up of credit and the U.S. economy entered into the so-called mini-recession of 1966-67. The Fed moved quickly to ease the money market, and the fed funds rate dropped back to 3.25 in May 1967. 


The final blow to the London Gold Pool was the Tet Offensive followed by U.S. President Lyndon B. Johnson’s decision to agree to Westmoreland’s proposed “troop surge.” By continuing to sell off their gold reserves to support the U.S. dollar, which they were required to do under the London Gold Pool, the West European imperialist satellites of the United States were, in effect, financing the war against Vietnam. On March 15, 1968, British Chancellor of the Exchequer Roy Jenkins announced that upon “the request of the United States,” the London gold market would be temporarily shut down. The gold pool was dead. The Bretton Woods System was at death’s door. By August 1971, the dollar price of gold exceeded $42 and was rising. On August 15, 1971, President Nixon ‘closed the gold window’, reneging on the promise to exchange gold for dollars. The U.S. dollar ceased to be credit money as far as the central banks and foreign governments were concerned.

Both Keynesians & Monetarists supported the ending of the role of gold.

The general price level of commodities had once again risen above the underlying labour values of those commodities.




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