World War II was one of the Houdini-like maneuvers that capitalism has miraculously come up with in its history to escape great crisis—in this case, the economic crisis of the depression years [1929-1939], which followed the political tumult of World War I and the Russian revolution. World War II—by contrast, and at the great social cost of a descent into fascism on the part of certain representatives of capital—lifted the global economy into full-fledged recovery, with special benefits to the United States, the new world hegemon.

In the United States before the war, the New Deal policies implemented by Franklin Delano Roosevelt's administration had proven to be moderately successful, but the US economy still faced serious constraints. In 1939, for instance, 15% of the American workforce was unemployed. The war effort quickly lifted the US labor force into full employment through high rates of output growth and investment—in other words, the economy was busy, with factories employing many workers, producing many products (which means more income, which then re-enters the system) and having an edge in productivity within the world system. This dynamic growth was driven initially by industrial production for the war, then by the expansion of production for export. The American economy, thus hyper-charged with industrialization, ushered in the Golden Age of post-WWII capitalism.

It is important to clarify that "Golden Age" refers only to the conditions of capital accumulation from the 1940s to the 1970s and to the rise of the "welfare state" in centralized economies within the capitalist sphere, primarily in Western Europe, Japan and the United States. These are also the countries that became synonymous with the term "First World." It does not describe the condition of complex social life around the world in an era that also brought forth the Cuban and Chinese revolutions, the Vietnam war, the de-colonization in Africa and Asia, the Cold War, McCarthyism, and intense class conflict and political turbulence around the globe.

To really understand what was happening during the Golden Age, it is important to look at the rate of profit. The global economy created conditions for very high investment rates, high output growth, low inflation—and surprisingly—low unemployment.

This economic climate created extremely favorable conditions for profit rates to grow. But what allowed the profit rates to continue to grow year after year, from the mid-1930s until the end of the war in 1945, was a pattern of technical change in which labor-productivity rose at increasing rates and capital productivity kept solid rates of growth. Technical change during World War II created more jobs than it destroyed, not the opposite, as conventional wisdom would expect.

The Golden Age trends in accumulation, profits, investment, output growth, and employment are associated with these particular historical conditions. As such, they laid the groundwork for the set of institutional arrangements that urged capitalism toward the mixed economies of the 1950s. In addition, the threat of communism and the US victory in World War II established the terms of the Pax Americana. Internationally this meant an increasing role for the US, which had already been the main creditor of World War I, and now seemed to have two main goals:

First, the political and economic containment of Soviet influence in Europe, which was seen as the most strategic region of the globe. This idea materialized in the reconstruction of Western Europe through a series of money transfers and direct investment like the short-term emergency relief from United Nations Relief and Rehabilitation Administration and especially the Marshall Aid (European Recovery Programme) that started in April 1948 and was due to last four years. The Marshall Plan provided aid to pay dollars ($13.365 billion) for commodities and services.

In Germany in 1947-49, 57% of imports were financed by this form of aid, which remained at 2.3% of GDP for five years, and peaked at 5%, thus helping Germany reach pre-war production levels in only three years.

Second, after 1950, US emphasis shifted to global military containment, a strategy that necessitated a worldwide American military presence, and wars in Korea (1950-53) and Vietnam (1957-75).

There was also a faction of the US government and capitalist class that wanted to create a set of long-term international arrangements capable of rebuilding and regulating global capitalism. Thus the US took a leading role in the organization of the Bretton Woods agreement, which was codified in new set of international institutions:

  • Exchange Rate Stability and Return to the Gold Standard:
    One of the main goals of Bretton Woods was the idea of exchange rate stability in order to avoid (according to Keynes) a "beggar thy neighbor" policy, through competitive devaluations of national currencies in order to boost exports. The negotiators at Bretton Woods devised rules of behavior designed to avoid unilateral devaluations. A crucial element in this new arrangement was a return to a gold-backed exchange rate system—the "gold standard."

    This worked via a mechanism that linked non-US currencies to gold via the US dollar. In practice, this meant that the gold-value of one dollar (fixed at $35/1 oz fine gold until 1971) was the core of the international monetary system. This dollar-backed, fixed-exchange rate meant that devaluations of currencies required American consent.

  • Financing Trade Deficits—The Creation of the IMF:
    The International Monetary Fund was set up to help finance trade deficits and prevent recessions. The Fund would manage a central pool of reserves used whenever a member country faced a temporary crisis in their balance of payments. The US has kept a tight leash on the IMF since its foundation and has historically been its main contributor.

  • GATT and Free Trade:
    The US insisted on trade liberalization. The new terms of trade were written up in the General Agreement on Tariffs and Trade [GATT], which was signed in 1947 and which was succeeded by the World Trade Organization [WTO] in 1995. GATT dictated that tariffs be removed, according to the tenets of orthodox economic doctrine, in a move that opened markets around the world for American products.

    And last, but not least...

  • The Establishment of the World Bank:
    The World Bank was created to finance the postwar reconstruction and development of post-colonial countries.

Franklin Delano Roosevelt and the New Deal:

In the 1930s, while Italy and Germany descended into fascism, the US moved from laissez faire into a considerably state-regulated economy. Under the administration of Franklin Delano Roosevelt [FDR], the US experienced a series of programs that established a new institutional setting for American capitalism.

The Social Security Act (1935) was organized in order to assure income for the elderly. The Wagner Act of (1935) finally allowed workers to unionize. John L. Lewis founded the Congress of Industrial Organizations (CIO).

FDR's economic policy incorporated heavier taxation on the wealthy than previously and a bold work-relief program for the unemployed. It also allowed deficits in the budget that took the US off the gold standard.

In addition, the Roosevelt administration created new controls over banks and public utilities. This was when Joseph P. Kennedy—Wall Street insider and father of the future president John F. Kennedy—was appointed Chairman of the Securities and Exchange Commissions.

The Golden Age regime was founded on a large-scale political compromise, or "social contract", between the bourgeoisie and the upper and middle factions of the working class that was mediated by the welfare state in the form of Keynesian fiscal and monetary policies. Spectacular conditions of profitability in the system during the Golden Age made it possible to redistribute gains from increased productivity back to workers in the form of real wage increases [ie. those that are adjusted for inflation]. The result was increased middle-class demand, which created a growing market for mass-produced goods that is now one of the fundamental features of modern industrialized societies.

By the late 1960s, the Golden Age had exhausted itself. There are many explanations for its decline and fall, but most of the Left traditions in economics agree that the end of the Golden Age was caused by a precipitous fall in the rate of profit toward the end of the 1960s.

The graph above shows the rate of profit in the American business sector from 1929 to 2003. Starting in 1965—after the economy recovered from a normal business cycle that had reached its trough in February 1961—we see the beginning of a clear and continuous fall in the rate of profits that lasted until 1982. [This time period is represented by the light band on the graph.]

The economic crisis of the 1970s expressed itself—in part—in the collapse of the Bretton Woods system. This involuntary restructuring of the very capitalist institutions that had legitimized the post-war social contract meant that a falling rate of profit was combined with dramatic shifts in international relations. The significance of such seismic activity in the very core of the global system becomes increasingly apparent with time.

The relative stability of post-war accumulation—that is, the long period of stability during the Golden Age—was partially based on a monetary system that ran according to America's rules. For instance, the gold standard in the post-war period owed its credibility to the US's enormous gold reserves. This feature of the monetary system gave American capitalism the ability to take on increasing amounts of foreign debt without the usual constraints faced by other nations, which are obliged to use US dollars for monetary reserves and as international means of payments.

But the dollar's ability to hold its value depended on the strength of the American economy and American capital abroad. As soon as the return on dollars invested by American firms started falling, the dollar-holdings on foreign countries assumed the marked characteristics of debt, with an increasing pressure on the link to gold. This situation generated a tendency for the devaluation of the dollar that was ultimately expressed in a liquidity crisis that reached the world economy in the late 1960s.

In a liquidity crisis, foreign governments no longer accept the dominant currency—in this case, US dollars—at the rates previously established. Starting in the late 1960s, a generalized liquidity crisis caused a run on US reserves similar to the runs on banks that occur during financial crises.

As a result, the dollar price of gold—the fixed link between dollars and gold—grew increasingly artificial, as dollars lost their value while still trading for gold at the old, fixed rate. The fictional dollar price of gold was ultimately exposed to the world by President Nixon on August 15, 1971, when the growing discrepancy forced him to take the dollar off the gold standard.

With this announcement, the apparent stability brought by the Bretton Woods agreement began to crumble. Free-floating currencies immediately replaced the Bretton Wood-based fixed exchange rate system, and inflation in the world economy shot up, with skyrocketing price increases—especially for oil.

According to Marxist economist Geoffrey Pilling, in his book The Crisis of Keynesian Economics, the resulting shock to the capitalist system was caused by its adjustment from the reality of the early 1950s—when US gold reserves were seven times greater than the dollar assets of foreign powers—to the reality of the early 1970s—when that figure had plunged to around one fifth.

And along with growing inflation, which was pumped up by the rising price of raw materials from the Third World, came a prolonged period of sluggish output growth, high unemployment, and increasing political unrest that paved the way for the neoliberal years of the 1980s.

The Rate of Profit

The rate of profit is—by its technical definition—the ratio of total profit to the total capital used in production over a given period of time.

rate = total profit / total capital

Less technically, it is a measure of the monetary return that a company, industry or economy gets from the sale of its products in relation to  the total stock of capital previously invested.

The level and movement of the rate of profit is one of the key vital signs of the capitalist system. It indicates the health of the system by telling us how funds that are available for investment will perform, with direct consequences for growth and employment.

A high profit rate would indicate conditions of good health in the system, and therefore good prospects for investment. A falling—although not necessarily low—profit rate would indicate conditions of poor health in the system, and therefore bad prospects for investment.

Be careful not to confuse the rate of profit with the share of profits in the total value of production. After products from a particular production cycle get sold on the market, the profit share tells us how much the capitalist gets from the sale. [The rest is distributed as wages and rent for the capital used during the production cycle.]

Since the profit share only covers one production period, it doesn't have much to say about conditions for further investment and growth (accumulation). And what capitalists care about is not just how much profit they make this year, but how many profits they make from their total capital invested.

[rate = total profit / total capital]

When the mass of profits (accumulation) grows more slowly than the mass of investment, it runs the risk of falling below a point Marx called the "point of absolute over-accumulation."

Beyond that point investment and growth can abruptly stop. Businesses can fail. And the social fabric can be torn by class struggle. The rate of profit falls, and runs the risk of producing a generalized crisis within the system.