[Pen-l] Henryk Grossman as prophet

[Louis Proyect <lnp3@xxxxxxxxx>]

(This is from Henryk Grossman's "Law of Accumulation" published a few 
months in advance of Black Friday in 1929. Simply amazing prophetic 
insights.)

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.
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