History Grade 11 - Topic 2 Contextual Overview

A cartoon illustrating the process of getting to the idealised “American Dream" Image Source

Introduction

Like communism in Russia, American capitalism was an ideological and policy framework that was varied in both approach and application. Capitalism first started taking root as an economic system during the industrial revolution beginning in England at the end of the 18th century. Industrial techniques and machinery spread from the textile mills in Lancashire to the European continent and across the Atlantic to independent America. In the last decades of the 18th century textiles mills were set up in New England, which in turn produced the first large-scale industrial techniques on the continent.

Throughout the 19th century along the north east coast of the United States, as it was expanding territorially to the west, more and more industries were set up along with new industrial techniques (one of the most famous being the Waltham-Lowell system).[1] The new industrial capitalists became incredibly powerful figures within American society, and from the 1880s to the 1920s developed a political system that relied on the close interaction between big corporations and the state. Reminiscent of the Military-Industrial Complex (coined in 1961 in by President Dwight Eisenhower), Meyer Weinberg suggests that during the half century or so precluding the ‘Roaring Twenties’, industrialists and bankers consolidated monopolies in selected – usually heavy – industries that relied on a political patronage network to function efficiently.[2] The onset of WWI further developed this relationship, where Allied purchase of American military supplies, along with the sale of Allied bonds in America, spurred on heavy industries.

In 1917, as the USA entered the war, Weinberg notes how “Major industrial interests profited greatly. Sitting at the lever of the political economy of war, industrialists learned the potentials of capitalism when it was integrated into the governmental system.”[3] It was this early, powerful relationship that set the groundwork for industrial capitalism in the first half of the 20th century.

This article brings into view the development of capitalism in the United States of America. We pay detailed attention to the crisis of capitalism that happened as a consequence of the Great Depression. From its inception, Roosevelt’s New Deal met strong criticism as it was assumed to install a “socialist” discourse and practice. To this end, we pose a question to ask whether Roosevelt’s form of state intervention to create job opportunities, as well as the social welfare system he set could be considered socialist in its orientation, and thereby undermined the capitalist system in the USA? There are no clear-cut answers to these questions, and this forces to ask a series of questions that considers the nature and significance of capitalism in the USA.

The Nature of Capitalism in the USA

It is an age-old adage that history is written by the victors. That Western capitalist countries such as USA, Britain and France  ‘defeated’ communism of the  East which was represented by the USSR Eastern Bloc with the collapse of the Berlin Wall and the dissolution of the Soviet Union is one such example – in this we hear echoes of the ideological battle that raged during the cold war between the communist east and capitalist west[4]. This ideological positioning, however, stretches further back than the post-WWII era; since the early 20th century, the American political culture has defined itself as capitalist. Whilst, as we have seen, WWI brought government control of important sectors of the American economy, the post-WWI political culture wished for a return of the industrial powerhouse to an unregulated economy.

As President Warren Harding, elected in 1920, said soon after his election, “I have said to the people we meant to have less of government in business as well as more business in government.”[5] The post-WWI era represented a wish to return to ‘normalcy’ in American economic and political life. The result was a retreat into isolationism after the founding of the League of Nations at the Paris Peace Conference in 1920. Harding’s death in 1923 brought to power his vice-president, Calvin Coolidge, who would share similar sentiments to his predecessor, proclaiming that “the chief business of the American people is business.”[6] Like Harding, Coolidge was opposed to entering the League of Nations, and a number of isolationist policies came into effect during his tenure, such as the 1924 Immigration Act. During this period, then, capitalism in the USA resembled classical liberal economics – relying on a small government where the market would regulate itself, and where social wellbeing would increase accordingly.

The American Dream

The Immigration Act of 1924, which capped the number of immigrants into the USA to 165 000 a year (and further restricted immigration from non-Western European countries), represented a reversal on the promises of the ‘American Dream’. The notion of the American Dream during the beginning of the 20th century meant, as Sarah Churchwell explains, “the opposite of what it does today.”[7] The original American Dream was “not a dream of individual wealth; it was a dream of equality, justice and democracy for the nation.”[8] During the Cold War, this egalitarian democracy was then repurposed to become “an argument for a consumer capitalist version of democracy.” This, Churchwell notes, is where it has been frozen.[9] The American Dream of democratic equality – of racial and economic opportunities – drove the migrants during the early 20th century to the sprawling American empire. It was supported by the histories of the first migrants in the 1600s, who escaped religious persecution in Europe.

More modern myths surrounding the American Dream were driven by stories of individual success amongst migrants such as Andrew Carnegie, spurning an entire literature of ‘rags-to-riches’ stories etched into popular memory by writers such as Horacio Alger.[10] These stories emphasised that entrepreneurship and hard work could lift one out of poverty into a comfortable, middle-class existence. Thus, the American Dream was a more just, and equal society that everyone could obtain. During the 1920s, this was articulated as a function of democratic capitalism – that wealth would bring more freedom and justice to everyone. However, in practice, there were stark racial inequalities, religious intolerance and class divisions.

The Roaring Twenties Image Source

The 1920s Boom

The pro-business policies of the Republican presidents in the 1920s (which included removing labour laws and reducing business taxes and tariffs) provided a boom for manufacturing and consumerism in the United States. During the 1920s low taxes for the rich allowed for the investment, and subsequent boom, in manufacturing, helped by the increasingly easy credit extended to businesses and entrepreneurs. Easy credit was not only extended to businesses, but also consumers, in the form of higher purchase arrangements. By the end of the 1920s, vacuum cleaners, refrigerators and washing machines became “everyday household items” to an increasingly urbanised American consumer class.[11] However, these gains made by the consumer class were unstable – by the end of the 1920s, the high tariffs imposed on foreign imports – a part of its isolationist policies and desire to protect American industries - meant that every day Americans were paying high prices for their new goods. Furthermore, in response to these tariffs, European states also begun placing tariffs on American goods. Thus, with the shrinking buying power of American consumers, and limited opportunity to export American industrial goods, American industries began to suffer.[12]

The previous gains made by the American labour movement also suffered. The pro-business policies of the decade were a reaction to the progressive labour policies that characterised the early 20th century. Labour strikes and unions were dealt with more harshly, and wages were kept low. Wages did not increase along with productivity (add stat here), which in the long run meant that workers were unable to buy the goods they were producing.[13] The low tax rate for the rich, and the lowering of corporate taxes, meant that the wealthy, without enough investment opportunities in industries) would use their money for prospecting, the effects of which caused the Wall Street (which we shall come to soon).

USA Society in the 1920s

The 1920s, also known as the ‘Roaring Twenties,’ was a socially significant era in American, and Western, history. The increased urbanisation of the American population, coupled with the expansion of consumer goods, brought large parts of the country into contact with a range of new goods and ideas for the first time. The 1920s began with the 19th Amendment of the United States, which extended the voting franchise to all females (although it would take over 40 years for that to be extended to black females in the South).  During the First World War, as men were sent overseas to fight, women began to increasingly work in blue and white-collar jobs. With their new political and economic freedoms, they began to increasingly exhibit social freedoms. Symbolic of this freedom were the emergence of ‘flappers’ – women who “smoked in public, drank alcohol, danced at jazz clubs and practiced a sexual freedom” that “shocked the Victorian morality of their parents.”[14] This generation was chronicled by writers such as F. Scott Fitzgerald, whose novel The Side of Paradise was instrumental in describing – and in some ways spurring on – the ‘Jazz Age’, a term that Fitzgerald popularised. 

Jazz was actually an important social contribution to the 1920s. The rapid migration to the cities – and the meshing of cultures (think of black Southern rural folk mixing with immigrants from Europe) that emerged with it – created new cultural hybrids, of which the free movement that jazz took was and is symbolic of. The new upbeat music in the city was also sent out across the country via radio, which had become an increasingly common commodity in households across the USA (the first commercial radio station - Pittsburgh’s KDKA - began in 1920; three years later there were more than 500 stations in the USA. By the end of the 1920s, more than 12 million households had radios).[15] However, whilst there were many aspects of the 1920s that spoke to a freeing of society, this decade also brought some of the worst racial violence of the century (think of the Tulsa Race Riots of 1921).  The Roaring Twenties saw a return of the Klu Klux Klan, which had two million members by the middle of the 1920s.[16] The Klan symbolised the friction that developed in the post-WWI era: between the urban and rural areas, between Catholics and Protestants, and between whites and blacks. This friction would continue to  dominate cultural discourse in the 20th, and 21st centuries

An image of an American that needs to sell his car due to the effects of the Wall Street Crash of 1929 Image Source

The Wall Street Crash of 1929

On October 28th 1929, also known as Black Monday, the Wall Street Crash began. Over the next few days, stock prices crashed to a point that would take ‘another 20 years’ before ‘the Dow regained enough momentum to surpass the 200-point level.’ Everyone was affected, from stockbrokers to farmers to blue-collar workers; many people, with the new wealth that the 1920s brought, invested in stocks. They lost most of their wealth. The reasons for the Wall Street Crash have been a point of debate for almost a century. Initially, it was thought to be simply the result of speculation: that a panic arose amongst shareholders and as they sold, share prices crashed and investors subsequently lost their wealth.[17] Thus, the immediate concerns were towards the banking industry: savings that the public kept at banks was invested by these institutions in the stock market, which meant they were all lost when the stocks crashed. In this situation, both the banks and the public lost money. Furthermore, the public could not repay the easy loans they were given by the banks, at which point they repossessed homes. With the economic decline, most people having lost large amounts of wealth, the banks could not sell repossessed homes, and so they lost money.[18]

However, these were only symptoms of deeper problems within the American economy and society at large. One was the imbalance of wealth that came to increasingly describe the nation. During the 1920s, the gap between the wealthy and the rest continued to widen and was the result of the various ‘pro-business’ policies already outlined above. In particular, the low taxes placed on the wealthy led them to speculation, whilst a lack of government intervention in large industries led to monopolies and high prices for consumers. Furthermore, the harsh attitude towards organised labour meant that wages were kept low, which further exacerbated the wealth gap. But inequality was also felt across geographic localities: overall, urban centres were better off than rural centres, and the North more prosperous than the South. Here again government policies were partly to blame – the various administrations of the 1920s failed to support agriculture in any serious way.[19]

What followed after the crash was the Great Depression. The American government was unprepared for an economic recession, and the lack of state intervention in the following years only made the situation worse. In 1930 there were four million unemployed Americans; by 1931 this was 6 million. In 1933, the worst year of the Great Depression, 24.9% of the American public was unemployed, and that rate continued to hover above 14% until 1940.[20] Between 1923 and 1930, 5,000 banks collapsed. This had major political consequences. In a complete reversal of the policies of the previous decade, Franklin Roosevelt won the 1932 election, defeating the incumbent Republican President Hoover. [21]

An image showing some of the effects of the Great Depression as experienced in America Image Source

The Election of Roosevelt

Democrat Franklin D. Roosevelt came into power on the back of promises of a ‘new deal’ that would address the problems brought about by the Great Depression. He has worked with a small group of advisors, called the Brain Trust, to achieve this end. The New Deal focussed on relief for the needy, recovery of the economy and reform of the economic system, specifically focusing on banks and the stock market. [22] The New Deal overtly rejected socialism but promoted government intervention to restore prosperity and reduce inequality. Roosevelt adopted 15 pieces of New Deal legislation in the first 100 days of office. [23].

Analysis of the New Deal

The first New Deal occurred from 1993 to 1935. In an effort to provide relief for the most needy, soup kitchens were established along with temporary housing. Funding was given by the Federal Emergency Relief Administration. In an effort to spur on economic recovery, several recovery programmes were implemented, amongst them the Civil Works Administration (CWA) - a job creation program. In addition, the Civilian Conservation Corps (CCC) provided thousands of men with jobs at national parks, public lands and other conservation projects. Within the recovery programmes there was the Agricultural Adjustment Act (AAA) which subsidized farmers to reduce their production and destroy their crops and livestock, so that supply could be reduced to increase the lowering demand in an effort to have better prices. In the reforming the economic system, Roosevelt implemented an emergency Banking Relief Act which stipulated that only banks deemed to be financially sound would be permitted to reopen their doors. To increase confidence, the government secured guaranteed deposits of investors in an effort to curb hoarding.[24]

The New Deal brought criticism from different parts of society, especially the wealthy and conservatives who were opposed to high taxes and the nascent social security network just being set up.[25] Furthermore, Republicans feared that the government was spending more money than it could afford, which would result in even higher taxes and a bloated bureaucracy. On the other hand, some left-wing groups criticised the New Deal for not being radical, arguing for the redistribution of wealth and the setting of a national minimum wage[26]. In addition, communists in America perceived Roosevelt as an autocratic leader. Within the Democratic Party there was also opposition, particularly from  representatives of Southern States who refused to see African Americans as political and social equals.

Assessment of the New Deal

For some, the advent of the New Deal threatened the cherished free market. However, one could argue that it prevented a potential revolution, driven by the unemployed and hungry. President Roosevelt restored confidence in liberal democracy. The New Deal removed the dangers of an unregulated economy without abandoning capitalism in America.[27] While the New Deal did not end the Great Depression, it brought back dignity to the American people.  However, the massive intervention of the state in the economy contradicted the belief of many capitalists. The corporatist state that the New Deal created (and which, to be accurate, was the state of capitalism during the late 19th and early 20th century) a new relationship between labour and business.[28] Labour provided a stable workforce whereas the government made sure to regulate markets when they became unstable. Conservative capitalists viewed this as socialism.

Outbreak of the World War II and the economic recovery of the USA

In 1937 there was a recession, which came to be known as the Roosevelt Recession. It was caused by cut backs on the New Deal reforms. During the mid-1930s, Hitler was on an aggressive path which eventually caused World War II. During this time, Roosevelt saw that the USSR was hoping to open up trade. In recognition of this, the USA employed three Acts so they would remain neutral. The first Act was stopping any shipment of US weapons to any countries who were involved in the war. The second Act was US loans to any countries who were involved in the war.[29] Lastly, the USA forbid any US citizen to travel on ships which belonged to any country which was at war. However, the US allowed food sales to countries at war on a ‘cash and carry’ basis. Due to improved economic conditions caused by an increase in industrial production, the USA was prepared for possible involvement in WW2. The US did this by providing their allies with war materials. In addition, the USA started drafting men into the army. In 1941, the USA officially entered WW2 where they fought Japan and Germany. This was a time where there was more prosperity in the US as government increased their spending.  The economic recovery of the USA was aided by the demand of weapons and in turn of raw materials to revitalise industry in the States.[30] By being involved in the war, the United States government invested significant capital into industries and men for the War. This was the beginning of the military-industrial complex which describes the close relationship between a nations military and its defines industry which supply it which together have a vested interest in influencing public policy.[31]

Impacts of and responses to the crises of capitalism in the USA in other parts of the world, such as Germany and Japan

The Great Depression spread throughout the world. When the USA recalled their loans, bank failures occurred across Europe.[32] Japan and Germany responded to this with militarist governments. Germany suffered more than any other nation as a result of the recall of US loans, which caused its economy to collapse. Unemployment rocketed, poverty soared and Germans became desperate.[33] Hitler quickly set about dismantling German democracy. The American and British governments developed welfare systems to aid their public. The 1929 New York Stock Exchange crash and the failure of important European banks plunged the entire world into an economic depression. Japan was hit especially hard. With practically no natural resources, the nation had to import oil, iron, steel, and other commodities to keep its industry and military forces alive.[34] The USSR survived and escaped the depression because of the Stalinist ‘Socialism in One Country,’ which favoured independent industrialisation, not reliant on the industries of other nations. Countries that exported raw products to the USA – such as Latin American countries, which exported farm produce - were affected the most.

Conclusion: The cyclical nature of capitalism

Capitalism typically displays a boom and bust cycle. Booms are defined as periods of economic growth categorized by increased spending through credit. Increased spending also encourages economic growth though raising stock market indexes[35]. However, in turn, increased price indexes lead to reduced investment and consumption spending due to high prices. Reduced investment spending and consumption are components of the bust part of the economic cycle as economic activity declines. The cycle reinforces itself as the government intervenes with fiscal policies that are meant to promote economic growth again.[36] In the context of the US, the 1920 economic boom followed directly by the Wall Street Crash of 1929 shows an example of this boom-bust cycle.

End notes