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Lewis Corey

The Decline of American Capitalism

PART TWO
Prosperity, Profits, and Wages

CHAPTER IV
Profits and Prosperity

THE ending of the World War in 1918 produced an economic recession, followed by an upward movement. A heavy export of capital and goods was the decisive factor in post-war prosperity. Stricken by war’s destruction, intervening in Soviet Russia, and threatened by the revolutionary action of its own workers, capitalist Europe mortgaged itself, kept on borrowing in the United States and imported large amounts of goods. American exports in 1919-20 were the largest in history: $16,148 million, with an excess of exports over imports of $6,965 million. [1] (This economic intervention in Europe was “our” major contribution to the struggle against revolution.) But production in 1919-20 was lower than in 1918 [1*]; prosperity was essentially speculative, based upon rising prices and foreign demand. Profits rose while real wages were almost stationary. Although production fell, an overproduction of goods developed in particular lines because of excessive output resulting from competition and in all lines because sharply rising prices redistributed income and reduced mass purchasing power. The equilibrium between production and consumption was upset. Prosperity crashed.

Prosperity revived in 1922, as in all previous depressions, by the action of economic forces independent of the planful intervention of the masters of industry and finance. This action assumes the form of liquidation of prices, wages, accumulated consumption goods and, primarily, of capital and capital claims (precisely as in 1929-34): it resembles the blood-letting of medieval medicine. The most important aspect of liquidation is the wiping out of capital and capital claims, modifying the disproportionate accumulation of capital which set in motion the forces of depression. Liquidation reaches a point where the economic equilibrium is restored, on a lower level, and production, consumption, and capital accumulation begin to revive. An increase in the production of consumption goods, because of depletion of accumulated stocks, may be a minor cause of revival. The major cause of revival is a renewed demand for capital equipment, either for replacements or new industries or both. New consumer purchasing power is created. Industry begins to move upward, slowly and planlessly.

The speed of revival and the scope of recovery and prosperity depend upon an increasing output of capital goods and the opportunities it provides for capital investment and accumulation. This in turn depends upon other than the ordinary cyclical factors, upon the development of new industries and unusual expansion of old industries. In the United States after the Civil War, accumulation was invigorated by the mechanization of old and the growth of new industries, particularly the railroads, and by industrialization of agrarian and frontier regions. In early nineteenth-century England, prosperity was identified with expansion of the textile industry and later of the iron and steel trades, while expansion of the electrical industry produced an unusual prosperity in the Germany of 1890-1905; another factor of expansion was the export of capital (and capital goods) to industrialize colonial and other economically backward regions. Only these long-time factors of economic growth stimulate the output of capital goods and insure an increasing accumulation of capital.

An unusual feature of the depression was the steadiness of machinery output, which ordinarily drops severely. While output dropped from $4,768 million in 1919 to $3,235 million in 1921, there was no great drop as prices fell; output rose in 1922 and was $4,727 million in 1923. [2] The demand for machinery modified the depression and encouraged revival, and was mainly due to efforts to raise the productivity of labor, which rose substantially. There were, apparently, fewer of the “postponable” expenditures on capital goods which aggravate depression ... The demand for machinery was strengthened by an upswing in construction, the industry which led the revival. Unlike industry in general, construction was not overproduced, but had accumulated a large shortage. Construction was practically stationary in 1914-16, and in the following four years averaged 28% below 1913. In 1921 construction, which had decreased one-half the previous year, regained all its losses and slightly more, and in 1922 was 35% higher than in 1913, increasing by nearly $1,000 million [3]; the increase was mainly in industrial and commercial structures, essentially an output of capital goods ... Railroads, whose ordinary requirements had been neglected during the period of Federal control, increased their capital expenditures to $1,059 million in 1923 and $3,996 million in the five years 1922-26. [4] ... The depression drop in the output of automobiles was small; output rose in 1922 and was $3,164 million in 1923, nearly $1,000 million more than in 1919 and a twofold increase considering the fall in prices. [5] ... The revival was essentially a product of the increasing output of capital goods, but it was strengthened by an unusual development: a substantial rise in real wages, which increased mass purchasing power and consumption. Consumption was 6.5% higher in 1923 than in 1920 [6], an unparalleled increase, stimulating production and, more important, the output of capital goods. After 1923 the upward movement in real wages and mass consumption slackened and came practically to a standstill: while total production in 1922-29 increased an average of 4.1% yearly, capital goods increased 6.4% and consumption goods only 3.7%. [7] Accumulation, as usual, outstripped consumption.

Prosperity was sustained by the upward movement in the output of capital goods, by increasing opportunities for the accumulation of capital. Construction moved steadily upward [2*]: it was 31% higher in 1929 than in 1922, scoring an average yearly increase of 6.1%; total construction was $48,859 million, an average of $6,100 million yearly. [8] Automobile output (wholesale value) averaged over $3,000 million yearly in 1923-28, rising to $3,719 million in 1929; a considerable part of the output consisted of capital goods: registrations of motor trucks, taxicabs, and buses increased more than private cars, while the wholesale value of motor trucks alone rose from $317 million in 1923 to $595 million in 1929. [9] The lessened capital expenditures of the railroads was partly offset by the rise in capital goods represented by increasing commercial use of the automobile and airplane. The drive to raise the productivity of labor (to increase profits) not only stimulated the demand for more industrial machinery but resulted in an increasing electrification of industry, the extent of which rose from 56% in 1919 and 67% in 1923 to 82% in 1929; capital investment in the electric power industry was $12,500 million in 1929 compared with $5,000 million in 1922. [10] The output of electrical machinery and apparatus rose from $1,293 million in 1923 to $2,273 million in 1929. [11] Expansion in new or comparatively new industries absorbed large amounts of new capital the moving picture, radio, rayon, chemical, aviation, mechanical refrigeration, and power laundry industries, whose combined value output in 1929 exceeded $1,500 million. This expansion made “large demands upon construction – industrial and commercial structures, “movie palaces,” and garages and service stations; it also made large demands upon machinery, the output of which rose from $4,727 million in 1923 to $6,964 million in 1929. [12] The expansion of new or comparatively new industries is particularly important since it demands more capital expenditures than similar expansion in old industries.

An increasing output of capital goods (not consumption goods) is the decisive factor in capitalist prosperity. It provides for the accumulation of capital and multiplies the capitalist claims upon labor, production, and income. But this involves a fundamental contradiction: realization of profit depends in final analysis upon the circulation of commodities, upon consumption, which accumulation tends to restrict. The stimulus to prosperity in the production of capital goods is twofold: it increases employment, wages, and profits (mainly profits) and creates consumer purchasing power, but for a time makes no demands or only slight demands upon consumer purchasing power to absorb new consumption goods. The danger to prosperity is threefold: the output of capital goods may represent excessive accumulation of capital, it may be concentrated in particularly profitable industries whose expansion becomes disproportionate in relation to other industries, and eventually the larger production made possible by the new capital goods outstrips the growth in markets and consumption. The output of capital goods begins to fall and wages, purchasing power and consumption are restricted. Prosperity crashes.

Two other factors affected American prosperity in 1922-29: the agricultural crisis and the recasting, by the World War, of international economic relations in favor of the United States.

The sharp fall in agricultural prices, a result of the post-war deflation which threw most of the burdens of deflation upon the farmers, contributed greatly to capitalist prosperity – by increasing real wages and releasing urban purchasing power for manufactured goods and by lowering the cost of raw materials. In spite of much lower incomes the farmers were forced by the low prices of agricultural products to increase productivity with improved methods and mechanization: the output (less exports) of agricultural machinery rose from $101 million in 1923 to $137 million in 1929. [13] Most farmers did not share in prosperity. But not only was the agricultural distress no bar to prosperity, it was one of the contributing causes: the final proof of the decline and hopeless state of American agriculture.

Where the World War aggravated Europe’s economic decline, it contributed to the upsurge of prosperity in the United States by its stimulus to old and new industries, its creation of shortages, and its opening up of new foreign markets. From the American angle, the most important result of the war was the redistribution of world power in favor of the United States and the economic decline of its competitors. The American share of world exports rose from 12.3% in 1913 to 15.6% in 1928; the European share declined from 55.2% to 46% and the British share from 13.9% to 11.2%. [14] American exports (mainly manufactured goods) rose from $3,971 million in 1922 to $5,157 million in 1929; a favorable export balance of $4,850 million piled up in 1923-29. The increase in exports was bound up with a growing export of capital; American foreign investments increased $6,293 million in 1923-29. [15] Imperialism, new foreign markets for surplus capital and goods, created new means for the making of profits and their conversion into capital, for accumulation, and sustained prosperity for a time by lessening the demands upon the home market to absorb goods and capital. Increasingly the world market took the place of the frontier and of its long-time factors of economic expansion; but the experience of one is bound to be repeated by the other.

Rising investment, production, and accumulation were accompanied by a rising mass of profits. Profits in manufactures are the natural starting point of an analysis of the movement of profits (Table I). In 1929 profits were 22.9% higher than in 1923, total wages only 6.1% higher. If the two years of minor cyclical depression 1924 and 1927, are excluded, profits in 1925-29 averaged 9% higher than in 1923. Officers’ salaries, a large part of which should be considered profit, rose steadily until in 1929 they were 16.4% higher than in 1923. The increasing productivity of labor was accompanied by higher profits and lower wages. But for the six years as a whole the profits of manufacturing corporations averaged only 1% higher than in 1923. (The rise was much greater, however, in comparison with 1922.) This seems to involve a contradiction the productivity of labor and surplus value rose considerably, yet profits apparently failed to rise as much. The contradiction dissolves upon analysis and reveals the welter of contradictions and antagonisms inherent in capitalist production.

Corporate profits are usually understated. There are all sorts of devices for concealing profits. One device is to make excessive allowances for depreciation to evade taxation. This was encouraged, during the “Golden Age” of American capitalism, by “liberalization” of the corporation income-tax law; the allowances in manufactures rose from $1,424 million in 1923 to $2,017 million in 1929 [16], a considerably greater increase than in capital equipment. Many corporations inflated the nominal value of their assets to permit larger depreciation allowances. Manufacturing enterprises, moreover, spent large sums on capital equipment which were charged to operating costs and do not appear as realized profits. These expenditures, which increase the productivity of labor and production, are capitalized surplus value. [3*] Another portion of profits was absorbed by the increase in officers’ salaries; this form of exploiting corporations is flagrantly revealed in the “bonus” system by which the higher officers extort an additional “compensation” of millions yearly. At least one-third of salaries represent profits.

The distribution of profits (and of prosperity!) is always uneven. It was particularly uneven in 1923-29 because of the many and rapid changes in industries, technical equipment, and consumer buying habits, and of the resulting intensified competition. There were many laments about “profitless prosperity.” Some industries were severely depressed while others were exceptionally prosperous. The automobile industry increased its profits an average of 22.5% yearly, machinery 14.9%, and chemicals and drugs 12.3% [17]; automobile super-profits were characteristic of the newer industries. But high profits among the newer industries was partly conditioned by lower profits among the depressed older industries, whose losses were frequently disastrous. [4*] Profits were unevenly distributed, moreover, as between smaller and larger corporations. The movement of increasing technological efficiency, production, and competition, resulted, as always, in greater industrial concentration and centralization of corporate control: in 1923 the largest 1,240 manufacturing corporations received 64.9% of all corporate net income, while in 1929 the largest 1,289 corporations received 75.6%. [18] An increasing number of corporations, mainly the smaller, reported deficits – 34% in 1919, 41% in 1923, and 47% in 1929. [19] These deficits, which depressed the mass of profits, are a condition of capitalist production and prosperity and of the profits of other corporations.

A characteristic of capitalist production is that its drive for larger profits creates a series of antagonisms which limit the realization of profits. Output increases more than profits, because capitalist production tends toward an absolute growth of the productive forces regardless of the capacity of markets and of the development of consuming power. Competition is intensified and prices fall to levels which yield small profits or no profits – one result of the higher productivity of labor, which simultaneously increases surplus value and sets in motion forces which prevent its complete realization. As competition is intensified by the higher productivity of labor and larger output, which outstrips markets and consumption, there is an increase in the costs of distribution, of merchandising and advertising, costs which are a charge upon surplus value and cut into profits: in 1923-29 that part of “value added by manufacturing” represented by overhead costs increased more than profits (and wages). The drive for larger profits creates a final antagonism: it develops the forces of cyclical breakdown by increasing productivity, production, and profits more than wages and consuming power, disturbing the balance between production and consumption and between one industry and another. The consequent disproportions interrupt prosperity with minor depressions, and eventually prosperity collapses into a major depression. Profits in manufactures fell considerably in the minor depression of 1924 and in the minor depression of 1927, which severely lowered the yearly average of profits in 1924-29. Depression is one of the most drastic means by which capitalist production limits the realization of profits. While profits in manufactures did not rise as much as production, the productivity of labor, and surplus value, profits as a whole rose more substantially. The general rise was larger than in manufactures; for surplus value, which exists originally as a definite portion of unpaid labor, as a surplus product, is finally realized only in the process of the circulation of commodities. The transactions of the market do not produce or increase surplus value, but they distribute and apportion it. All sorts of queer things now happen which are normal under capitalism. Not only may the industrial capitalist realize as profits only a small portion of surplus value or none at all, if prices are unfavorable, but a struggle occurs over the division of the surplus value extorted from labor, and an increasing part of it may become the profits of the non-industrial capitalist. The profits realized by the individual capitalist or corporation depend considerably upon trickery, the chances of the market, and other similar circumstances. Financiers may plunder the manufacturing corporation, speculators may seize its profits. Chain stores compel small manufacturers to sell at prices yielding low profits and often no profits at all; large manufacturing corporations (e.g., the automobile industry) pursue the same tactics with small manufacturers of semi-finished raw materials or parts. Bank loans may absorb an increasingly larger share of manufacturing income. Finance and holding companies exploit operating companies by extortionate “service charges” and other predatory devices: high profits in the one case arise out of low profits in the other. Thus financial and speculative capitalists are enriched. The mass of profits accordingly appears only in their final realization and distribution as a whole (Table II). Total profits rose and rose substantially. The profits of all corporations are understated, as in manufactures. In addition, interest, as much as profit, is realized surplus value: corporate interest payments rose from $3,277 million in 1923 to $4,924 million in 1929. [20] Profits in 1929 were 41.1% higher than in 1923, and officers’ salaries 29.7% higher. Average yearly profits for 1924-29 were 12.7% higher than in 1923. Profits rose more than production and the national income, and more than wages. The yearly average of all wages for 1924-28 was higher than in 1923; but this is not the true measure of wages in relation to corporate profits, for it includes the wages of servants and of workers in non-corporate enterprises, whose profits are not included, and all of which, however, have large elements of social-economic parasitism. A truer measure are industrial wages (manufactures, mining, construction and transportation); for 1924-28 the average of industrial wages was only 0.5% higher than in 1923.

As in the case of manufactures, the distribution of total corporate profits favored the monopolist combinations of capital; the greater trustification of industry resulted in a greater concentration of profits:

• In 1923, the largest 1,026 corporations, 0.26% of all corporations, received 47.9% of all corporate net income, an already dominant concentration.
• In 1929, the largest 1,349 corporations, again 0.26% of all corporations, received 60.3% of all corporate net income, an increase of over one-fourth in concentration. [21]

The concentration of industry in monopolist combinations and the multiplication of stockholders result in the usurpation of control by a financial oligarchy, groups of financial capitalists operating by means of a system of centralization of financial control dominated by the great banks. Industry depends more and more upon the financial oligarchy, which consequently absorbs an increasingly larger share of the surplus value extorted from labor. This was particularly marked in 1923-29:

• The profits of non-financial corporations rose from $4,948 million in 1923, to $5,645 million in 1929, or 14%, the profits of financial corporations (including banks, investment banks, finance and holding companies) from $870,000,000 to $2,438 million, or 177%, a phenomenal increase.
• The profits of non-financial corporations in 1924-29 averaged 2% lower than in 1923, the profits of financial corporations 69% higher. [22]

A considerable portion of financial profits, particularly in 1928-29, was a result of frenzied stock-market speculation, the gains of which represent both previously appropriated surplus value and claims upon new surplus value. Finance capital, interested more in the speculative production of profits than in the production of goods, dominates industry; the appropriation of surplus value and profits is increasingly separated from their production.

Corporate disbursements to investors increased greatly. Dividends (excluding intercorporate dividends) rose from $3,299 million in 1923 to $5,765 million in 1929 and interest payments from $3,277 million to $4,924 million. Total corporate disbursements in seven years amounted to $88,000 million. While the average yearly increase in industrial wages was only 0.5%, the increase in stockholders’ income was 16.4%. [23] Part of the immense profits was spent on the living expenses of their appropriators, whose income was further swollen by extortionate salaries or fees and by speculative profits; but most of it was invested, used for the production of more profits. The great mass of available investment capital was enlarged by the profits of non-corporate business and by the large savings of the middle class and the small savings of better-paid workers and farmers. (There was great competition for the “marginal” income of the “common people.” Bankers and brokers shouted: “Save and invest!” Manufacturers and merchants shouted: “Spend and make prosperity!”) The enormous accumulation of capital exerted tremendous pressure on the investment market. Many issues were made out of whole cloth, and investment bankers often forced corporations to issue new securities. Abundant capital and “easy money” tempted corporations to improve and enlarge plant equipment, which temporarily stimulated prosperity but resulted in an increasing displacement of labor and overproduction. The flood of new securities was swollen by the issues of investment trusts (guilefully offering security and large profits!), trading companies, and holding companies, an important source of the phenomenal financial profits. Foreign issues increased; American bankers accepted any business yielding good commissions and their loans contributed to sustaining the Fascist dictatorship in Italy and the military dictatorships in Cuba and Venezuela. The superabundance of investment capital made easy the absorption of an unusually large mass of new issues:

• The total of new securities (excluding refunding) rose from $4,304 million in 1923 to $10,182 million in 1929, an increase of 137%.
• New corporate issues rose from $2,031 million in 1923 to $8,002 million in 1929, a four-fold increase; total corporate issues in the seven years amounted to $30,523 million.
• New foreign issues rose from $892,000,000 in 1923 to $1,572 million in 1927 and slumped to $762,000,000 in 1929, the total for the seven years being $7,805 million; where domestic issues (excluding investment trusts and trading and holding companies) increased an average of 7.7% yearly, foreign issues increased 10.1% – an indication of the rapidly increasing importance of the export of capital.
• The aggregate of all new issues in 1923-29 amounted to $48,548 million. [24]

In addition to raising capital by issuing securities, corporations customarily reinvest up to one third or more of their profits; surplus rose from $33,596 million in 1923 to $50,725 million in 1929. In the year of the great crash, in 1929, capital expenditures of all sorts (including public works) probably totalled $15,000 million. Total corporate capital rose from $191,000 million in 1923 to $233,000 million in 1929. [25]

Thus increasingly higher profits and their conversion into capital by means of an increasing output and absorption of capital goods resulted in an upsurge of prosperity. The active accumulation of capital expressed an unusual combination of the long-time factors of expansion: it appeared only once before in American history, in the period immediately after the Civil War. Then the major factor sustaining the upward movement of prosperity was the development of old and new industries, particularly building construction, iron and steel, railroads, and agricultural equipment. In 1923-29, prosperity was sustained by expansion in building construction, electric power, and new industries. In both cases expansion created increasing demands for capital goods, which stimulates the making of profits and their conversion into capital. The most important difference was replacement of the frontier by greater industrialization of the South and by the export of capital. The latter was the more fundamental difference: it offset exhaustion of the inner long-time factors of expansion by imperialist exploitation of similar international factors.

But the maintenance of prosperity requires a proportional distribution of investment and consuming income, a sustained balance between the output of capital goods and consumption goods, between production and consumption. There was no such distribution or balance; and the basic reason for its absence was the antagonism between profits and wages, resulting in the lag of wages behind profits. This antagonism is fundamental in capitalist production.

 
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Footnotes

1*. The index of physical volume of production in manufactures was 104 in 1918, 98 in 1919 and 101 in 1920. A.M. Mathews, The Physical Volume of Production in the United States, Review of Economic Statistics, July 1925, p.208.

2*. The average yearly increase in apartments and hotels was 3.7%, in one and twofamily houses 5.1%, in commercial and industrial structures 8.1% and 9.3% respectively, and in public works and utilities 11.4%. In 1927-29 the construction of industrial buildings increased 50%. Frederick C. Mills, Economic Tendencies in the United States (1932), pp.264-66. The upward movement in construction was sustained primarily by the demand for structural capital goods. The lack of this demand has forced adoption of the government’s public works program in an effort to fill in the gap.

3*. Such sums spent on capital equipment do not appear in surplus, which rose from $13,060 million in 1923, to $19,465 million in 1929. Bureau of Internal Revenue, Statistics of Income, 1923, p.63; 1929, p.332. Corporate savings or surplus are an impersonal, social form of the accumulation of capital.

4*. While profits (including intercorporate dividends and before payment of taxes) increased in 1922-29 an average of 7.4% yearly for all manufacturing corporations, profits decreased among 815 corporations in 28 industries, including textiles, canned goods, lumber, paints, glass, textile machinery, and railroad equipment; the increase in the profits of the more prosperous corporations averaged 9.8% yearly. Mills, Economic Tendencies, p.401.

Notes

1. Department of Commerce, Statistical Abstract of the United States, 1931, p.488.

2. Department of Commerce, Commerce Yearbook, 1929, 2 vols. (1930), v.I, p.41.

3. Frederick C. Mills, Economic Tendencies in the United States (1930), p.191; National Bureau of Economic Research, Recent Economic Changes (1929), v.I, p.220.

4. National Bureau of Economic Research, Recent Economic Changes, v.I, pp.258-59.

5. Statistical Abstract, 1931, p.403.

6. John R. Arnold, The Trend of Consumption in the United States, Annalist, September 28, 1928, p.473.

7. Mills, Economic Tendencies, p.280.

8. Mills, Economic Tendencies, p.246.

9. Commerce Yearbook, 1929, v.I, p.437.

10. Department of Commerce, Census of Manufactures, 1929, v.I, p.112; Hugh Quigley, Electric Power, Encyclopedia of the Social Sciences, v.V (1931), p.459.

11. Commerce Yearbook, 1929, v.I, p.236.

12. Commerce Yearbook, 1929, v.I, p.410.

13. Commerce Yearbook, 1931, v.I, p.431.

14. Bureau of Foreign and Domestic Commerce, The Balance of Payments of the United States in 1929 (1930), p.2; Great Britain, Royal Commission on Unemployment Insurance, Final Report (1932), p.95.

15. Bureau of Foreign and Domestic Commerce, Balance of Payments, p.4.

16. Bureau of Internal Revenue, Statistics of Income, 1923, p.14; 1929, p.267.

17. National Bureau of Economic Research, Recent Economic Changes, v.II, p.641.

18. Statistics of Income, 1923, p.118; 1929, pp.328-29.

19. Statistical Abstract, 1932, p.175.

20. Statistics of Income, 1923, p.13; 1929, p.330.

21. Statistics of Income, 1923, p.118; 1929, p.328.

22. Statistics of Income, 1923-29.

23. Statistics of Income, 1923-29; Mills, Economic Tendencies, p.504.

24. Commerce Yearbook, !9 2 9 v I> PP318-19.

25. Statistics of Income, 1923, p.63 and 1929, p.333; W.H. Rastall, The Machinery Industry at Grips with the Business Cycle, Mechanical Engineering, January, 1933, p.11; Mills, Economic Tendencies, p.438.

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