Burn, Wall Street, Burn!

Patrick Bond pbond at wn.apc.org
Wed Sep 2 23:15:12 PDT 1998

> Why did gold do well for SA in the 1930s? A fixed price in a deflationary
> world?
> Doug

Well, since you ask, here's the extended play version, from a paper I published this year on Finance and Uneven Development in SA...

The year 1929 brought many of the tensions into sharp relief. Local bankers were extremely bullish, as their ratio of loans to deposits soared from 63 percent in 1926 to 85 percent in 1930, with half of the increase coming in 1929. Land speculation meant that "in some districts the value attributed to farm property looked to be 50 percent too high," according to Henry (1963: 230). "Standards had changed, and these were the days of the motor-car, bought for 30 percent of its cost in cash, and the rest on credit." As often happens just before a fall, overproduction of agricultural goods became rife, and the government intervened with increasingly protectionist policies. Imports of wheat, flour and sugar were discouraged, and a Marketing Board was established to support South African exports.

Speculative activity in overseas stock markets also became quite acute during the late 1920s, reflecting the global rise of overaccumulation crisis. Even prior to the 1929 crash, foreign investment in South Africa essentially dried up (although this was also related to occasional official hostility to the mines). Government borrowing brought in some new money from overseas, especially in 1930, but South African financing on the London Stock Exchange in 1929 fell to less than half that raised in 1928, and less than a quarter of the 1927 total. As one example of the strain between local and international financial forces, Standard Bank was under a great deal of pressure to export funds to its London office. The Reserve Bank intervened, imposing a levy for bank remittances and increasing the interest rate it charged local banks (Henry, 1963: 235-248).

The 1929 crash was initially felt mainly by the diamond merchants, since rich New Yorkers' panic liquidation of their personal assets flattened diamond prices. As the broader depression set in and the general price level of most goods fell over the next few years, agricultural products bore the brunt of the devaluation. Further state intervention was required on behalf of rural whites, especially laws supporting debtors' rights. White workers and displaced farmers made a series of proposals for rural credit cooperatives and for municipal banks in Johannesburg and Durban during the mid-1930s.

South African exports -- with the exception of gold -- were also affected. When exports decline, one antidote is to devalue the currency. But when a country is on the gold standard, the currency is valued according to how much gold the county has in reserve stockpiles. When such countries go deeply into debt and import more than they export, their gold stocks naturally decline in order to make payments. Most major countries had already adopted the gold standard in the last quarter of the nineteenth century, mainly because of pressure from commercial capitalists to have convertible currency so as to lubricate international trade. It was in this process that most industrial countries' national monetary systems emerged or stabilised, which led Clarke (1988) to conclude that the rise of the modern nation-state was actually a function of the power of international finance.

The South African situation after the 1929 crash was heavily influenced by this logic. As the full force of what would be a decade-long depression came to bear upon the global economy, and as country after country fell into debt, the gold standard became an anachronism. It had been resurrected by Britain in 1925, following a six-year lapse, in order to stimulate international trade. But during the 1930s, too many countries simply couldn't afford to back their currencies with gold, and in 1932, after Britain -- still at the centre of international finance -- abandoned the gold standard, thirty-two countries followed, with only France, Belgium, Switzerland and the Netherlands holding out until 1936. Without a way to root the value of currencies, international trade stagnated and protectionist currency blocs developed. South Africa was part of the British colonial Sterling Area, while North and South America traded with dollars, central and southeast Europe were ruled by German finance, the Japanese yen was the East's currency, and a small gold bloc was maintained in western Europe. As the world's leading gold producer, South Africa had no technical difficulties remaining on the standard. But because the value of the South African currency remained high relative to other currencies, exports suffered. At the same time, investors were shifting enormous amounts of money out of South Africa (o20 million in 1932). By the end of 1932, the tensions were overwhelming and the country's social fabric was tearing, so mining houses led the charge to abandon the gold standard and devalue the currency.

This was one route out of the local depression, but not the only one. Another might have been a major public works and employment programme, some components of which did indeed occur for the benefits of whites later on during the 1930s. Because popular organisations like the Industrial and Commercial Workers Union, Communist Party and African National Congress were weak following five years of intense repression, and because white workers continued to place priority on their struggle for racial supremacy, the mining houses were able to determine the path out of depression. In a vacuum of international economic leadership, they benefitted from the pressure brought to bear on South Africa by speculators run amok in the global economy. "The purely speculative `flight of capital' made the maintenance of the gold standard temporarily difficult in South Africa," Schumann (1938: 263) concedes, but adds: "Theoretically as well as practically, and from a purely technical or economic point of view, the country could have remained on gold through suspension of the convertability of notes into gold, so as to prevent an `internal drain,' mainly through a policy of immediate and drastic foreign exchange control." Instead, the laisser faire route of currency devaluation was chosen. As the tie to the South African currency was broken, more and more gold could be mined without weighing down the rest of the economy. Gold now allowed the country "the prosperity of the undertaker in a plague," as went the popular adage, thanks to residual international fears of paper financial assets.

Recovery, 1930s-40s

The first result of going off the gold standard was that vestiges of speculative financing again appeared from abroad, pushed away from Europe and the United States by the deepest depression in capitalist history. South Africa's banks still weren't increasing their loan portfolios, as the productive economy had not begun to recover. Given fresh sources of funding and few projects, the banks restructured interest rates. For several decades before 1932, banks lent to companies at around 6 percent (for three-month commercial bills) while paying savers 3,5 percent (for six- month deposits). Bank lending was controlled less by price (the interest rate) and more by restrictive conditions. (These conditions even applied to the Oppenheimer empire. Before the gold standard was abandoned, Anglo American was unable to raise just o50 000 from either Standard or Barclays for mining expansion.) By early 1933 the rates changed dramatically: 5 percent for loans and 0,5% for savers. Where demand for loans existed, enormous financial profits were gained from this interest rate spread.

Within months of going off the gold standard, gold and agricultural exports picked up again (though diamonds remained weak due to their status as a luxury good), and the rest of the economy followed. According to Schumann (1938: 295):

The immediate effects of the depreciation of the

currency were

* a rapid change-over from an extreme scarcity of

money to an almost unprecedented plentifulness, as

evidenced in the increase in bankers' deposits and the

fall in short-term interest rates;

* an exceptional boom in gold-mining shares and in

promotion and building activity on the Rand and


* a proportionate increase in the export prices of farm

products, and a consequent improvement in the relative

position of the heavily depressed agriculture;

* an expansion of industrial production, in transport, in

imports; and

* an exceptional improvement in Government revenue. Foreign interests profited, as interest and dividends paid to investors (down from o17 million in 1926 to o13 million in 1932) rose dramatically to o18 million in 1933. Yet during the subsequent fifteen years, the South African economy was relatively isolated from international manufacturing trade, and thus financing was increasingly directed towards the nascent local manufacturing industry. In a manner Andre Gunder Frank (1967) observed occurring elsewhere on the global economic periphery and which helped generate many of the insights of the "dependency school," manufacturing grew in inverse relation to the strength of trade in the international economy. Positively affected by Northern depression and war, South Africa spent the period from 1933 through the 1940s growing faster (8 percent average GDP increase per annum), more evenly across sectors, and with larger relative wage increases for blacks, than at any other time in the twentieth century (Nattrass, 1981: Appendix).

In general, at particular moments of turbulence in world economic history, gold plays a crucial role as the ultimate store of value. South Africa was able to take advantage of this role, but in this instance did so by following the particular path chosen by the mining houses. This was a less direct way of kick-starting post-depression growth than via state intervention, but prevailed due to the balance of forces at the time (1933), during the waning months of what was nominally a popular ruling alliance of white workers and farmers.

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