Louis Proyect: The Unrepentant Marxist

April 17, 2008

The Prophet Grossman

Filed under: economics — louisproyect @ 7:00 pm

(This was posted originally to the online Introduction to Marxism class at yahoo.)

In the final chapter of Henryk Grossman’s “The Law of Accumulation and Downfall of the Capitalist System“, there is a section titled “An Inductive verification” that is simply amazing for its almost prophetic insights into the stock market crash of 1929. Grossman was responding to exactly the same kind of “irrational exuberance” that was being projected in the business press and bourgeois economics in the roaring `20s. Keep your eyes peeled for my highlighting.

An inductive verification

I have proposed two sorts of argument: i) that the valorisation of capital is the driving force of capitalism and governs all the movements of the capitalist mechanism – its expansions and contractions. Initially production is expanded because, in the early stages of accumulation, profit grows.

Afterwards accumulation comes to a standstill because, at a more advanced stage of accumulation, and due to the very process of accumulation, profit necessarily declines. ii) Apart from trying to explain the oscillations of the business cycle I have tried to define the law of motion of capitalism – its secular trend – or, in Marx’s words, the general tendency of capitalist accumulation. I have shown how the course of capital accumulation is punctuated by an absolute overaccumulation which is released, from time to time, in the form of periodic crises and which is progressively intensified through the fluctuations of the economic cycle from one crisis to the next. At an advanced stage of accumulation it reaches a state of capital saturation where the overaccumulated capital faces a shortage of investment possibilities and finds it more difficult to surmount this saturation. The capitalist mechanism approaches its final catastrophe with the inexorability of a natural process. The superfluous and idle capital can ward off the complete collapse of profitability only through the export of capital or through employment on the stock exchange.

To take up this latter aspect. Hilferding devotes a whole chapter to speculation and the stock exchange (1981, Chapter 8). All we learn from it is that speculation is unproductive, that it is a pure gamble, that the mood of the stock exchange is determined by the big speculators, and banalities of this sort. Because Hilferding denies the overaccumulation of capital he removes any basis for understanding the essential function of speculation and the exchange. In his exposition the stock exchange is a market for the circulation of titles of ownership, divorced from and rendered independent of the circulation of the actual goods. Its function is to mobilise capital. Through the conversion of industrial capital into fictitious capital on the exchange, the individual capitalist always has the option open to withdraw his capital in the form of money whenever he likes. Finally the mobilisation of capital in the form of shares, or the creation of fictitious capital, opens the possibility of capitalising dividends. According to Hilferding speculation is necessary to capitalism for all these reasons.

In all this there is no reference to the function of speculation in the movement of the business cycle. I have already pointed out that superfluous capital looks for spheres of profitable investment. With no chance in production, capital is either exported or switched to speculation. Thus in the depression of 1925-6 money poured into the stock exchange. Once the situation improved at the end of 1926 and the start of 1927 credits were displaced from the exchange into production.

The relationship between the banks and speculation which is discernible in the specific phases of the business cycle is also reflected in minor fluctuations within any given year. In periods when the banks can employ their resources elsewhere the exchange is subdued; it becomes brisk only when those resources are again released. Speculation is a means of balancing the shortage of valorisation in productive activity by gains that flow from the losses made on the exchange by the mass of smaller capitalists. In this sense it is a power mechanism in the concentration of money capital.

Let us take the present economic situation of the USA as an example of these movements. Despite the optimism of many bourgeois writers who think that the Americans have succeeded in solving the problem of crises and creating economic stability, there are enough signs to suggest that America is fast approaching a state of overaccumulation. A report dated June 1926 notes that

Since the War the capital formation process has advanced with extreme rapidity. Capital is now looking for investment outlets, and due to its overflow, it can only find these at declining rates of interest. Naturally this has meant an increase of all … real estate values … Furious speculation in the real estate is one result. (Wirtschaftsdienst, 1926,1, p. 792)

The basic characteristic of the economic year 1927 is that industry and commerce have watched their production fall, their sales decline and their profits contract. Reduced sales and lower production release a portion of the capital which flows into the banks in the form of deposits. The banks attract industrial profits for which there are no openings in industry and commerce. At the end of 1927 the holdings of the member banks of the US Federal Reserve System were $1.7 billion more than a year earlier. This constitutes a rise of 8 per cent against the 5 per cent considered normal.

The retrogression in industry and commerce contrasts sharply with the overabundance of cheap credit money.

The discount policy of the Federal Reserve Board has to be seen in this context. It is not that capital flows into Europe because rates of interest are higher. On the contrary US rates of interest have been cut in order to promote an outflow of capital. The financial expert Dr Halfeld reports that there were two reasons why in August 1927 the US banks of issue reduced the discount rate from 4 per cent to 3.5 per cent. Firstly to create an outflow of gold to Europe which is short of capital and, secondly, to revive domestic business. Yet this discount policy failed. Despite the substantial outflow of gold, US interest rates continued to remain low in the open market and vast sums of money were directed into speculation. The depressed state of industry is reflected by an expansion of speculative loans and speculative driving up of share prices. According to estimates of the US department of commerce, in 1927 the USA invested $1 .648 billion of new capital abroad. While this was partly matched by a reverse flow of $919m, the greater part of this money flowed straight into the New York stock exchange for speculation. Advances by New York banks by way of brokers’ loans on the stock exchange totalled $4.282 billion at the start of May – 46 per cent higher than in the previous year. On the other side, disbursements to industry and commerce remained low up to the middle of February. Towards the end of March there was a massive outflow of capital from the country, including large-scale buying up of foreign securities.

As a countervailing measure, the federal reserve banks decided on a discount policy which was the reverse of the one followed late in 1927. All twelve banks raised the discount rate from 3.5 per cent to 4 per cent. In April 1928 the Chicago and Boston bankers increased the rate a second time to 4.5 per cent and several banks followed suit. The discount rate thus returned to a level not seen by American money markets since early 1924. The results of the new discount policy appear to have been a complete failure if we go by the staggering bout of speculation on the New York stock exchange in the last week of March 1928. In fact despite the measures taken by the clearing house association against further extension of speculative credits, the flood of speculation reached a feverish pitch by August.

The fever of speculation is only a measure of the shortage of productive investment outlets. Dr Flemming is therefore quite right in saying that loans to foreign countries offer one way of eliminating difficulties since income from production cannot be redeployed on the domestic market. Not higher profits abroad, but a shortage of investment outlets at home is the basic underlying cause of capital exports.

Today America is doing its best to avert the coming crash – already foreshadowed in the panic selling on the stock exchange of December 1928 – by forcing up the volume of exports. The recent Copper Exporters Incorporated has been followed by the formation of the Steel Export Association of America, a joint export organisation of the two major American concerns – US Steel Corporation and Bethlehem Steel. When these efforts are matched by a similar drive by the Germans and the British, the crisis will only be intensified.


  1. What do you predict for today, upon analogy to Grossman’ predictions from the 1920’s ?

    Comment by Charles — April 17, 2008 @ 10:25 pm

  2. If I had Grossman’s expertise, I’d hazard a prediction. Not having it, I know better than to make one.

    Comment by Louis Proyect — April 17, 2008 @ 10:42 pm

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