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New International, August 1938


David Cowles

Spending and the Stock Market

From New International, Vol.4 No.8, August 1938, pp.241-244.
Transcribed & marked up by Einde O’Callaghan for ETOL.


ON MONDAY, JUNE 20, the stock market spurted sharply and continued upward. The response has been immediate. The capitalist economists are aflutter with hopes of a new prosperity. The capitalist press magnifies the spurt with frontpage headlines; it proclaims it as the trumpet call to recovery; it seizes upon it as proof that the long depression which has oppressed the lives of the workers and taunted the hopes of the farmers and middle class, is now behind; and in all ways it utilizes it to perpetuate the falsehood that capitalism is capable of restoring prosperity.

Already there is an answering echo of pious hope among rank and file workers, untutored labor leaders, pink-tea liberals and plain, ordinary deceiving scoundrels in the ranks of the working class. The dilettante radicals and opportunists who base their political programs primarily upon “the mood of the masses” and not on objective economic and social trends, will soon whirl and gyrate with every flurry of the ticker tape. They, too, will join the shouting throng, although somewhat late.

Among responsible Wall Street investment services, there is much less optimism. In its issue of June 18, Poor’s Investment Service wrote,

“The stock market is gradually working itself toward a point from which a sizeable move may develop. Direction cannot be predicted with certainty, although the economic background suggests the downside.”

And their judgment of the economic background was that “only in the January 1932-April 1933 interval of the Great Depression was business activity below the current level”.

Standard Statistics made a similar analysis in its Weekly Review of the Business Prospect published as late as June 24. It summed up its leading article as follows:

“Decline Is Becoming Progressively More Sharp, but Living Costs Are Receding Very Slowly – Purchasing Power Is Already Curtailed, and Total for the Full Year Probably Will Not Be Much Above That in 1932 – Drop Is Most Severe in Industrial Trades.”

The fact that despite widespread economic decline the stock market spurted upwards is of prime importance. In the past, stock market trends reflected existing profits due to increasing productive activity. Or it reflected hopes of future profits to be gotten from expected expansion in production. In both cases, the hopes were based on the self-generating expansion of American capitalism and on the expectation of profits to be garnered from it. But this was in the progressive period of capitalism.

Today, capitalism is in decline and the stock market no more reflects its self-recuperative powers. The present stock upsurge, for instance, did not begin June 20. It began, actually, two and a half months before, in the opening days of April. From that time on it climbed slowly and waveringly until it began its sharp rise on Monday, June 20. At no time did this rise reflect rising production and expanding business activity. Both these continued to decline. They gave decreasing profits in the present and. even less hope of profits for the future. Such prospects could not sustain a falling market, much less stimulate a rising one. Looking only toward private industry, Poor’s could see no justification for a rising stock market and concluded logically that “the economic background suggests the downside” in the stock market.

Were capitalism dependent upon itself for recovery, Poor’s prediction would have come true. However, capitalism today is incapable of self-recovery. Today the great stimulant of recovery is government aid. In 1933, government aid in the form of pump-priming and credit expansion gave the impetus to recovery. The current crash began in the early months of 1937, when government aid dwindled away. Today, too, government spending and credit expansion have begun the work of recovery and excited the stock market with hopes of profits. The stock market, therefore, has become an indicator of hopes of profits based on government spending and not on the expansion of capitalism.

Market Dependency on Government Spending

That this is true is proven beyond question if we compare the stock market trends with government spending. The stock market rise that began in April reflected increased government spending that had begun in March. Between February and March, government spending for public construction in 37 states had increased from $50,000,000 to little less than $100,000,000. This fact is doubly important. As a user of capital goods, the construction industry is interwoven with practically all the durable goods industries, some of which are dependent upon it almost entirely for their market. Furthermore, as a disburser of purchasing power, construction activity distributes purchasing power in greater degree than average industries. The purchasing power it distributes is all used for consumption purposes and serve to stimulate the consumption goods industries.

Building construction – and naval construction – had direct effect upon other industries. Steel production halted its precipitous decline. Lumber and cement industries began to pick up immediately. The increased purchasing power distributed was reflected in increasing output of cotton goods and in increased sales.

By April, there were growing signs that the depression was scraping bottom, that government spending was taking hold and that recovery was around the proverbial corner. Some of the more important indicators of cyclical revival began to appear. The unadjusted index of automobile production began to rise slowly in February and continued upward into April. The unadjusted index of new passenger car sales rose over fifty percent between February and April. The index of total residential building contracts awarded rose almost one hundred percent during the same interval. Net railway operating income, which declined very sharply during March to April 1937, smoothed out its decline during the same months of 1938. The most comprehensive economic indexes have either slowed up their decline or made slight upturns.

The question is no more “When will decline end?” The real questions now are: How great will be the recovery? How long will it last? What will it mean to the workers?

The extent and duration of the recovery are conditioned by the dominating fact that recovery is the product of government spending. The lack of private capital expansion is due to the unprofitableness of investing in new capital goods when the old are not used to their full capacity because it is unprofitable to use them. The moans that government spending is competing with private spending and driving it out of the market is sheer nonsense that may deceive the capitalists into unfounded self-confidence, or dupe their gullible listeners, but no one else. The reason is that this competition is sheer myth. There is not enough private capital expansion to speak of. That is precisely why the depressions are so deep. That, too, is precisely why government spending determines the upswing out of depression and sustains the recovery.

Government spending and credit expansion are so important that we would do well to analyze their nature and limitations; their economic significance and class-political import.

In previous periods, government spending was limited to maintaining the government and aiding an expanding capitalism expand more rapidly and more profitably. The permanent items in government expenditures were the legislative, executive and judicial branches of the government; the government bureaucracy; the military service and its armaments; various direct aids to aid the expansion of industry and agriculture; and aducational grants to states. Except in unusual instances, the revenue to cover expenditures was obtained by taxation. Where this was insufficient, the government obtained a short term loan to cover the deficit. Surpluses from taxation in the next years would suffice to retire the loan. The government revenue, therefore, was obtained by the redistribution of the national income by means of taxation.

During the recent years of declining capitalism, government expenditures have increased by billions due to the appearance of a new group of items. The items have a twofold aim: First and foremost, to stave off decline and to aid recovery in industry and agriculture. The struggle is not for expansion but for a more modest objective: recovery. Second, to stave off revolution by at least partly satisfying the needs of the many-millioned unemployed. The revenue to meet these expenditures is not obtained through the regular method of raising taxes. This would be difficult and dangerous. Economic decline has borne down upon the workers and unemployed, lower middle class and farmers, and shorn them of ability to pay much more. Economic decline has bitten into the profits of the capitalists and made them unwilling to stand any more. Government revenues for increased expenditures have come from loans made by bankers to the government.

This government spending beyond its regular revenues – this “deficit spending”, as the financial journals call it – was, at first, not unwelcome to the bankers. They were overflowing with unused money. If they refused to lend the government money, it might be taken from them in the form of increased taxes. Lending money to the government not only staved off increased taxes but it left ownership in the hands of the bankers and even gave them rewards in the form of regular interest payments from the most stable government in the world. The advantages were obvious: 1) they succeeded in evading taxation; 2) field for profitable investment of unused money. Nevertheless, as the years went by and “deficit spending” loomed in sight without stop, they became more hesitant and more critical.

The critical attitude was not the outcome of mule-headed opposition because recovery was government-inspired. The criticism arose out of their increasing realization of the limitations of a recovery that could only be sustained by “deficit spending”. The reason is that government bonds are capital claims on government revenues that must ultimately be met by increased taxation, including taxation upon production and profits. An increasing government debt, which is a stable source of profits to bondholders, is at the same time a drain upon them. It causes them to pay part of the cost of economic recovery at the expense of recovery in their profits.

The Danger of Inflation

Moreover, there is always the danger that the government might make up some of the deficit by issuing money, and increasing the circulation of money out of proportion to the increase in production – i.e., by inflation.

Inflation would destroy the capital claims of financial interests, although benefitting industrial interests by increasing prices and profits. It would stimulate an upswing in production and wholesale sales resulting from the efforts of producers and wholesalers to prepare themselves against future price increases. In this upswing, workers and farmers would suffer. The wages of workers would lag behind prices and their purchasing power would plummet downwards. Much the same would happen to the farmer, whose cost of production and subsistence would rise faster than the selling price of his goods. These would confront the government with an explosive dilemma. It must either stop inflation or increase it. If it stopped inflation it would stop the increasing prices and the heightened suffering. But if it did this, it would end the rapid rise in profits, remove the inflated expectations of future profits, and destroy the stimulus to further production. It would catapult the country into a drastic depression that would increase suffering and with it the danger of social revolution. The alternative would be con-fiscatory taxation upon the rich to redistribute the national income and put purchasing power into the hands of the workers and unemployed and the impoverished farmers and lower middle class. Such taxation would practically wipe out profits, the very life-blood of capitalism.

If the government maintains deficit spending, it cannot keep it constant. It must increase it successively. The reason is that rising prices cut purchasing power and consumption lags behind production. Unless consumption is stimulated, there will be growing over-production of goods relative to effective demand. Unless consumption is stimulated, inventories will swell, competition will slash prices, profits will fall, and the inevitable crash will again prove inevitable. But if consumption is to be stimulated, it can only be by the distribution of currency among the workers and unemployed to enable them to meet the rising prices and to consume the output of industry or by direct taxation upon the wealthy and the redistribution of the national income in the interests of increasing the purchasing power of the impoverished millions.

In both alternatives, economic recovery can only be maintained by depressing the profits of the capitalists to the point where they are practically destroyed. This can be done either by keeping down prices relative to wages or by increasing wages faster than rising prices. But this strikes at the very heart of capitalism – profits. It strikes at capitalism at the very time when its profits are already falling due to economic decline. The government, as “the executive committee of the ruling class”, fights to increase profits in a fashion compatible with its own continued existence. It gives the unemployed a small bone in the form of less than subsistence relief. But, at the same time, it more than compensates the capitalists by lending them money – which are really gifts in many instances – by raising prices and by permitting higher profits. But, in doing so, it already lays the basis for the next and worse crash.

This dilemma holds the New Dealers like a vise. It determines their every piece of reform legislation. It determines the present recovery. It determines the extent and duration of the recovery. And it also sets in motion the very conditions that will catapult the country into unheard of crises and pose without qualification the roads: socialism or fascism.

This analysis applies without qualification to the present upswing. Roosevelt’s program of spending is $4,100,000,000 for the fiscal year ending June 30, 1939, according to the estimate of the Economist. The deficit approximated by Roosevelt in an official summary is just about equal to it. It is $4,084,887,600. In addition, the Reconstruction Finance Corporation is authorized to lend up to $1,500,000,000 to corporations requesting loans. That much, and maybe most, of the loans will amount to gifts is proven by the fact that the Reconstruction Finance Corporation recently wiped off its books $2,500,000,000 of unpaid loans. To cap it all, the government has begun a policy of stimulating credit expansion, thus reversing the former policy of restricting credit expansion in order to avoid inflation. The program of inflationary credit expansion consists of two items:

  1. The government has reduced the reserve requirements of the member banks of the Federal Reserve System, and has thereby increased their excess reserves by $750,000,000. This sum can serve as the basis for a credit expansion of five times as much.
  2. The government has desterilized $1,400,000,000 worth of gold and placed it to its credit with the Federal Reserve System. The government’s spending power is increased proportionately without having to resort to taxation or loans. This sum, too, as it is spent, will become part of the excess reserves of the member banks, who altogether will now have $2,150,000,000 excess reserves which can be used to finance the expansion of private industry.

The theory underlying the whole program is that private spending and expansion can be stimulated by giving recovery a government send-off. Presumably public works will demand increasing output of capital goods, stimulating the capital goods industries and spreading purchasing power. Presumably, increased purchasing power should stimulate capital expansion in consumption goods as well as in capital goods industries, and all this expansion will take place in anticipation of increasing profits. Once this upward spiral has begun, government spending can taper off gradually. Private investment would then be left to carry the full burden of recovery.

Unfortunately for the theory, private investment itself is supported by government spending. Government spending for public works, in creating a demand for capital goods, also makes it profitable for the industries to make replacements. However, they are unlikely to make investments on any large scale. New investments to be profitable would have to be accompanied by increasing output and the output would not be increased unless there were a reasonable expectation of having markets for it. The very fact that there is no appreciable market for an increasing output of capital goods is what shuts the basic industries and characterizes capitalist decline. Government spending for public works, at the same time that it opens up a sizeable market also makes the capital goods industries unable to produce without it.

Another, and indirect, stimulus to capital goods output is government subsidies to consumption in the form of relief. This purchasing power is spent entirely on consumption and it stimulates consumption industries to replace obsolete capital equipment. The capital goods industries are required to use the plant capacity more fully or order new equipment. The resulting increase in wages and purchasing power of the workers in the capital goods industries contributes to swell the total purchasing power. But successive demands for capital output cannot remain equal to the first. They must surpass it. If not, capital goods activity will not increase, the purchasing power it distributes to workers in their industries will not increase, the displacement of workers in industries by technological improvements will reduce the total purchasing power at the very time that there is an increasing output of consumption goods flung upon the market by the more modern equipment.

This will mark the beginning of the crash unless foreign trade increases or general consumption increases. But foreign trade offers no rosy prospects. It is declining and it cannot take an increasing export of manufactures and capital goods. The deadly competition between countries for the world market is only a bloody witness to the decline of world capitalism. This avenue of escape from economic stagnation, hitherto open, is already measurably closed. A general increase of consumption would enable the depressed masses to consume, what is from the standpoint of the profit system the “surplus goods”. This could be achieved by reductions in prices accompanied by giant outlays for public works at trade union wages, by giving employment to all unemployed through drastic reductions in working hours, by raising the general wage level, and by financing the consumption with drastic taxation upon the wealth of the rich. But this alternative would result in drastic declines in the rate of profit and endanger capitalism itself.

The Dilemma of Profits or Plenty

This dilemma of profits or plenty holds the New Dealers like a vise. It limits their every piece of reform legislation. It limits the present recovery. It limits the extent and duration of the present recovery. And it also sets in motion the very conditions that will catapult the country into unheard-of crises.

Meanwhile, the upswing has begun. Its meaning for the workers we described in a former issue of the Socialist Appeal, when the “recovery and relief” program became law. The analysis given then holds just as true today and is worth repeating:

At best, the program will bring a feverish recovery that will be short in duration, precipitate in decline, and at all times will press down the living standards of the workers and farmers. The public works program will employ a portion of those displaced from private industry by the current depression. The major portion, however, will still be unemployed. In addition, there will remain the 9,000,000 who were unemployed at the peak of economic activity in 1937. The housing program will increase employment in the building industry as well as the auxiliary capital goods industries. However, all this will fail of its purpose unless private industry joins in the expansion. The Roosevelt administration realizes this. The purpose of desterilization of gold and the expansion of credit is to stimulate expansion in private industry by inflation.

The inflation program will cause a spurt in economic activity, causing a further increase in employment, although it will never absorb, all the millions of unemployed. However, it will also increase prices and the cost of living for the workers. Workers now employed will suffer substantial cuts in real wages. The unemployed who are now on relief or getting $54 a month on works projects, will be even more depressed. Those unemployed only will get temporary relief who get jobs in private industry as a result of this inflationary upswing.

But this relief will be shortlived. Inflation will cut the purchasing power of the workers and unemployed. Surplus products will pile up as capitalists prepare themselves against future price rises. Consumption will have lagged again behind production. And the illusion of recovery will crash into the reality of depression.

One modification only has to be made to this conclusion. The inflationary upswing will at the same time have tuned up the productive machinery in preparation for war. Within less than two years the alternatives – of catastrophic depression accompanied by the danger of social upheavals or war of imperialist expansion – will present themselves. Wilson before him had chosen the alternative of World War. Roosevelt, far more than Wilson, has prepared for this alternative and will take it when the occasion arises.

The present stock upsurge not only reflects the government’s inflationary policy of stimulating recovery but it also presages the coming war for American imperialism.

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