CRASH COURSE 
Andre Gunder Frank 

In.this excerpted version of an article in the 'Economic and Political Weekly of Nov. 
14, 1987 one of the foremost dependency theorists, Gunder Frank, observes that the 
stock market crash of Monday Oct. 18 was the alarm not the fire, and the question was 
posed whether the events in the financial sector could be prevented from spreading to 
the real economy of jobs, income and production. He finally raises the issue whether the 
post-war system of international finance and world trade as we know it may become un­
sustainable. 

In October 1987 under the helicop­
ter blade of Damocles, an irrelevant 
emperor, without clothes, living an 
economic fantasy in a looking glass 
world that he was unable to compre­
hend or control, was yelling befuddled 
Hooverisms (to make a collage of com­
mentary from Time magazine and the 
International Herald Tribune, or Trib 
for short, which also publishes edito­
rial and other material from the New 
York Times and The Washington 
Post), In the meantime money "talked 
as Carl Gewirtz noted in the Trib, ci­
ting the Morgan Guaranty Trust . 
Bank's Rimmer de Vries, who obser­
ved that the markets were imposing 
what politicians are unable to do (or 
even to comprehend?). As a result, 
Ronald Reagan's favourite magic of 
the market itself was writing what 
John Kenneth Galbraith called the last 
, chapter of Reaganomics. This was, in 
other words (of New York Times 
colmunist Anthony Lewis), the tur­
ning point to the end of the Age of 
Reagan. Some months before already, 
reviewing The Wall Street Journal 
columnist Alfred Malabre's book "Be­
yond Our Means: How America's 
Long Years of Debt, Deficits and 
Reckless Borrowing Now Threaten to 
Overwhelm Us", 'Adam Smith' had al­
ready foreseen in The New York Re­
view of Books that president Reagan 
"wUi be seen like Hoover, a nice fellow 
who blew our patrimony and who pre­
sided over a great fall". Yuppie young 
urban upward mobile professionals are 
transformed into poor urban profes­
sional Puppies instead. 

On Black Monday, October 19,. 
1987, the TWA published 77ie Washing­
ton Post editorial commenting on the 
previous Friday's 108 point decline of 
the Dow Jones Index, cm the New 

York Stock Exchange: "Don't Panic, 
but Act now. Comparisons with 1929 
are inevitable. But there will not 
be another crash a la 1929....Since 
then the American financial system 
has been substantially panic-proofed". 
That day apparently, Yuppies and 
others had suddenly become illiterate. 
The Post batting average was about 
100: It was doubly right (200) on the 
first score, since that very day the 
Dow Jones crashed 508 points, or dou­
ble its October 1929 percentage dec­
line. Unfortunately, the Post batted 
only .001 on the second score: After 
90 stocks had stopped trading alto­
gether for lack of buyers at noon, the 
Big Board's Chairman John Phelan, 
himself nearly shut down the market 
entirely for fear of a "melt-down", 
from which it was only saved by the 
temporary snutaown of the stock 
futures exchange in Chicago. Not pa­
nic-proof confidence, but chaos. Ame­
rican Roulette became more like- its 
Russian counterpart. 
Confused Comparisons 

Confusion worse confounded com­
parisons between and with the years 
before and after 1929 now abound. 
Many are willing to go to any lengths 
to find supposed differences. On 
October 30, the Trib printed the 
Washington Post editorial to the effect 
that the differences between then and 
now are night-and-day because the US -
and world economy were already in 
recession before the 1929 crash, while 
now in contrast the economy is ex­
panding rapidly. On October 23,,the 
Trib had informed that in>192$istpcks 
had fallen before theurecession. Both 
times unfortunately, iaty had neglec­
ted to read the Trib of October 20, 
which cited the general manager of 
the central banker's Bank for Interna­

tional Settlement to the effect that the 
1929 crash foDowed a period of exces­
sive economic boom that is nowhere 
apparent today. So there is- no reason 
to fear any resultant decline of busi­
ness investments, he said, because 
there are hardly any to begin with! 
From the Financial Times, and else­
where we learn mat stocks recovered 
significantly in 1930, but economic 
growth turned increasingly negative in 
the depression until 1-933; and by then 
stock prices had declined to a small 
fraction of the level to which they had" 
fallen in the 1929cra$h. 

Other supposed saving grace diffe­
rences between then and now are that 
the banking System has been shatter-
proofed by FDIC (Federal Deposit In­
surance Corporation) and the Glass-
Steagall Act in the US, which bars US 
banks - from the security business. 
Moreover, monetary and fiscal policy 
has supposedly become much more so­
phisticated and effective. While then 

• the US Federal Reserve (Central). Bank 
squeezed credit and liquidity, on Octo­
ber 20, 1987 its new chairman aih. 
nounced himslef "ready to serve as a 
source of liquidity tp support the eco­
nomic and financial system"(thereby 
comfirming, contray to Milton Fried­
man's monetary gospel, that central 
bank's monetary 'policy' really accom­
modates to economic events rather 
than determining them). Finally, 
world economic integration and co-or­
dination is much greater and facilita­
ted by round-the-clock computer com­
munication. Indeed, the truth, albeit 
not necessarily the virtual protection 
or protective virtue, of this last propo­
sition was demostrated by the round-
the-world do-mino-like chain reaction 
to the October 19, 1987 Wall Street 
crash. 

After Black Monday, the New York 
Times correctly observed that tne mar­
ket crash was the alarm, not the fire; 
and the ' Washington Post and others 
posed;'the crucial question whether 
events in the financial sector can be 
confined. there without spreading 
through the fire walls to the real eco­
nomy of jobs, income and production. 
All these metaphors, however, reflect 
a serious lack of depth, vision and his­
torical perspective. Beyond the chic-
ken-and-egg debate over crash and re­
cession, reflected in the Trib, the inter­
actions between the financial and real 

E C O N O M I C R E V I E W D E C E M B E R '1987 9 



economies are much more complex 
and longer lasting. Last time, real eco­
nomic crisis conditions already pre­
vailed during, the 1920s, particularly 
in the previously leading economy of 
Britain and the upcoming one of Ger­
many. Indeed, some students of long, 
economic cycles date the downturn 
from 1913. 
•-.- By that reckoning, 1929 was 16 
(or 9) yearis into the development 
of the economic crisis. As in previous 
economic crisis developments (inclu-. 
ding that observed after 1762 by the 
real Adam Smith, who published his 
"Wealth of Nations" in 1776), the run­
down of profits and growth rates, in 
the real economy, as well as its increa­
sing sectoral and regional imbalances, 
generated the flight into financial spe­
culation characteristic of the 1920s. 
By the late 1920s, real growth rates 
were down, and commodities and ag­
riculture were depressed. Germany was 
obliged to make war reparations pay­
ments of' 2 to 3.5 percent of GNP, 
which in his "The Economic Conse­
quences of the Peace" John Maynard 
Keynes had already pronounced unsus­
tainable for Germany and counter­
productive for the world. The political 
agreements of the Young and Daws 
plans were unable to reduce Germ-
many's payments sufficiently. They 
were financed by the inflow of Ameri­
can capital while it lasted: 'hut in 1929 
the market stopped the flow, the in­
creased hardships in Germany helped 
bring on Hitler in 1933, and he stop­
ped the unsustainable reparations. In 
the meantime, all other international 
economic cooperation had broken 
down, and depression had engulfed 
the world. 
Origin in Real Economy. 

The present world economic crisis 
also began in the real economy with 
the decline in the rate of profit in the 
mid-1960s and the recessions of 1967 
and. 1969-70. In the United States, 
President Johnson's Great Society and 
Vietnam War were financed with in­
flation and foreign capital. Growing 
real and financial competitive imba­
lances and refusal of Europeans to sus­
tain them obliged President Nixon to 
unpeg the dollar from gold and de­
value it in 1971 and led to the break­
down of the post-war Brettpn Woods 
Agreement (and the failure to replace 

it). Exchange rate pegs were sacrificed 
to allow floating exchange rates to 
act as shock absorbers of economic im­
balances and other disturbances; but 
instead they acted as coil springs, 
which have transmitted and magnified 
economic shocks. The 1973-75 reces­
sion, which turned growth rates and 
world trade negative and doubled un­
employment, shocked analysts into 
attributing it to an 'exogenous' oil 
shocks, instead of analysing it as the 
further development of the world 
economic crisis. The markets, how­
ever, responded with the historically 
normal solution to the real problem;, 
debt financed financial speculation. 
In. 1974, Business Week • dedicated a 
special, issue to 'The Debt Economy' 
and in 1978 to 'The New Debt Econo­
my', which it found to have more than 
doubled in the four years past. By 
1985, the same Bipiness Week devoted 
another special issue to ringing the 
alarm bells about the 'Casino Society'. 
Tight monetary policy notwithstan­
ding, Robert Triffin observed that 
world financial reserves had grown 
over tenfold in ten years (confirming 
again that monetary authorities only 
accommodate financial liquidity to real 
needs if even that, since in this case 
much of the money was created by the 
Eurocurrency market beyond the con­
trol of any monetary authority). 

In the 1970's, in direct response to 
the 1973-75 recession and in support 
of the 1975-79 'recovery' much of the 
financial speculation was directed at 
the debt finance of 'export led growth' 
in the Third World South (in the New­
ly Industrialising Countries and OPEC 
surplus countries) and 'import led 
growth' in the Socialist East. The debt 
financed import demand of both,sus-
tained Western industrial exports and 
bank earnings, which replaced the 
inadequate investment demand and 
profitability in the West itself during, 
the still growing crisis. Unfortunately 
as had to be, this apparent speculative 
'solution' to real problems ceased to 
work in the South and the East after 
the 1979-82 recession. The 1975-79' 
recovery had been even weaker and 
less solidiy based than the one prece­
ding the 1973-75 recession. Now the 
1979-82 recession was much more 
severe (doubling Western unemplo-
ment once again) compared to the pre-

. ceding;one, third world and socialist 
countries experienced an acute liqui­
dity crisis as first the recession drove 
down raw material commodity prices 
and therewith their export earnings. 
Then the US monetary 'authority' res­
ponded by raising the dollar and the 
rate of interest, and suddenly western 
banks dried up their voluntary flow of 
loan capital to the South and East, 
which brought on their debt crisis in 
198.1-82. 
To prevent illiquidity from turning 

into insolvency, the third world had 
to generate much more foreign ex­
change just. to service the interest on 
their debts. This obliged these coun­
tries to start slashing imports (thereby 
reducing Western industrial and agri­
cultural exports), produce more for 
export (thereby driving commodities 
prices even further down), and become 
capital exporters on a massive scale. 
Compared tc Germany's annual capital 
exports for war reparations of 2 -per­
cent of GNP in the 1920s and a maxi­
mum of 3.5 percent of GNP between 
1929 and 1931, some third world 
countries today ware being drained of 
5 to 6 percent of their GNP just to ser­
vice their foreign debts. Since the debt 
crisis erupted in 1981 in Poland and 
in 1982 in Argentina, Mexico and Bra­
zil, the poor third world has been bled 
dry of over $ 500 billions of dollars of 
capital exports to the richer West ($ 
200 bn in debt service, over $ 100 bn 
in capital flight, $ 100 bn in terms of 
trade loss, and $ 100 bn in normal pro­
fit and royalty remittances). 'Growth' 
rates were negative, for several years; 
investment shrivelled into disinvest­
ment, especially in productive infra-

. structure and social services; unem­
ployment multiplied; real wages and 
earnings tumbled, especially for the 
poorest; and GNP per capita declined 
by over 10 percent in Latin America 
and Africa on the average, and in some 
countries including Poland and Bolivia 
by over 25 percent. In other words, 
the 'fire wall' between financial spe­
culation and the real economy became 
the flood gates through which rushed 
onto Latin America and Africa (and 
parts of Eastern Europe and Asia), a 
depression that for them is already 
more severe than that of the 1930s. 
US Voodoo Economics 

Under these circumstances, which 

10 E C O N O M I C REVi<=W D E C E M B E R 1987 



also compromised recovery of export 
dependent western industry, of course 
speculation and cyclical recovery since 
1983 had to seek greener pastures. 
They were found in the United States. 
Therei in Vice President George Bush's 
terminology, Voodoo Economics 
reigned supreme in the form of Rega-
nomics. With an unstable amalgam of 
Laffer's laughable supply side and 
Friedman's frivolous monetarism, 
Ronald Reagan innocently tried to 
square the circle even more than his 
predecessor Lyndon Johnson: Reagan 
sought to increase defence spending, 
cut taxes, and eliminate the budget de­
ficit Simultaneously (when only a com­
bination of any two of these was ma­
thematically possible) and he wanted 
thereby to make America Number One 
Again to boot. Of course, the whole 
enterprise was doomed to failure, and 
the preliminary results are well known. 
The budget deficit became a gaping 
hole and the trade deficit became a 
spawning gap. The United States be­
came the world's largest foreign debtor 
(soon to match that, of all Latin Ame­
rica and then of the third world), and 
domestic debt of all kinds -federal, 
state and local public debt, corporate 
debt, and private consumer debt, not 
to mention the stock market and junk 
bonds - rose 15 to 20 percent faster 
than GNP. However, Reagan's Military 
Keynesianism in the American Casino 
Society permitted Europe, Japan, and 
the East Asian NICs (but not the rest 
of the third world, which was forced 
to place its losing bets ) to play Ame­
rican Roulette. Their cyclical recovery 
and growth since 1983 was sustained 
by exports to the American market. 
In turn American 'Living Beyond Our 
Means' consumption, investment, de­
fence expenditures, budget deficit, 
trade deficit, US treasury bonds, junk 
bonds, Wall Street, and the dollar it­
self were all sustained only by the in 
flow of specualtive European and Ja­
panese, and debt-bondage-forced third 
world, capitaL The supply side turned. 
out to be the supply of foreign capital. 

Moreover, American Reaganomics, 
but also Thatcherism in Britain, Socia­
lism and then cohabitation in France, 
Conservative-Liberal Alliance ih Ger­
many, Nakasone in Japan, and other 
Western governments have had to ex­
haust virtually all their readily availa­

ble accommodation monetary and de-
ficitafy:fiscal, policy .instruments just 

• to sustain their speculatively based do­
mestic cyclical recoveries. With gaping 
budget deficits- and sky high debts al­
ready, what economic policy instru­
ments remain for them to face the 
next recession, let alone depression, 
when anti-cyclical monetary and fiscal 
policy will really be needed? Further­
more, if the major economic powers 
failed in their feeble efforts to co-or­
dinate these monetary and fiscal poli­
cies on the easy street of speculatively 
based recovery, what prospect can 
they hold out when bursting specula-, 
tive bubbles, capital flights, recessio­
nary or depressionary dangers, protec­
tionist threats, defence and other con­
flicts make political agreement and 
economic coordination even more ne­
cessary and difficult in the hard times 
to come? 

A collage of some more serious 
press commentary on Black Monday 
and its aftermath is that the stock mar­
ket is one of the best leading indica­
tors (Trib) (previous post-war declines 
have preceded recessions; including 
those of 1967, 1969, 1973 and 1979). 
People voted with dollars instead of 
ballots (Journal) in response to threa­
tening long-term fundamentals (Econ 
omist) of which Europeans see adrift 
US economic policy and political po­
wer vacum as the root cause (Trib). As 
a result, all previous forecasts are out' 
of date (Economist),, and indeed 
many growth rate forecasts were im­
mediately revised downward by a third 
to a half (Financial Times). Thus, 
there is no return to business as usual 
(Financial Times),. because things will 
never be the same again and caution 
is the new watchword even if the stock 
market recovers (Economist).. While 
60 percent of Americans polled ex­
pressed unconcern, the Chrysler 
Corporationtreasurer warned that "you 
ain't seen nothing yet" as it reduced 
its pension fund equity exposure by 
nearly half/Financial Times). While the 
oif millionaire Rockefeller declared all 
sound in 1929, his oil billionaire suc­
cessor Perot finds nothing sound in 
1987 
Global impasse 

Indeed already before Black Mon­
day many observes had long since diag­
nosed the serious illness of the Ameri­

can economy, an exposed financial 
system, inept, monetary and fiscal po­
licy, deficitary foreign trade even in 
high tech, uncompetitive industry, 
oversubsidised .agriculture yet., bank­
rupt farmers, and general down fall 
from highway bridges to. space Chal­
lenger. 

The United States and its partners 
are also trying to square the circle 
around the world. They seek simulta­
neous, balance in (especially American) 
domestic budgets and foreign trade, 
European and Japanese export surplu­
ses ( as well as third world ones to" fi­
nance their debts), stable interest and 
exchange rates, and' economic growth 
without inflation or recession to boot. 
Such Globonomics would require' even 
more political economic alchemy than 
Reaganomics. This is all the more the 
case since Black Monday condemned 
the contribution of the latter's magical 
hbw-you-see-it-now-you-don't hat 
trick' to its last chapter, and pious 
/erse. 
The financial market and its politi­

cal interpreters had pronounced that 
the United States now must inevitably 
reduce its twin budget and trade de­
ficits. If policy makers would not do 
it 'voluntarily', the market would do 
it ruthlessly. But how, and with what 
consequences? Now lower budget de­
ficits would be recessionary, and Ihe 
Economist argues that at least double 
the $ 23 billion schedule by Gramm-
Rudman are a necessary minimum: 
Either government tax increases or 
spending cuts, let alone both together, 
to reduce the US federal budget de­
ficit would be recessionary per se, and 
they could contribute to a deeper de­
pression in an already market genera­
ted recession. Even Herbert Hoover 
offered tax deductions and new public 
works spending and Franklin Delano 
Roosevelt's New Deal carreid them 
even further. Unlike Ronald Reagan, 
they had not already wasted these an-
ticyclical munitions before the real 
battle began. 

Indeed, u America were ever to pay 
even the interest, let alone the princi­
pal, of its still growing foreign debt, it 
would have not only to eliminate its 
trade deficit. The United States, like 
the third world debtors before it, 
would have to convert its present mas­
sive import surplus into an export sur-

E C O N O M I C R E V I E W D E C E M B E R '1987 II 



/ a u . 

plus instead. This would mean an enor­
mous turn around in US and world 
trade. Either US imports would -have 
to dwindle to less than exports, or US 
exports Would have to increase enor­
mously, or some of both. Who would. 
absorb such US exports in an econo­
mic crisis, which would itself be aggra­
vated by them? Certainly not the POOT 

and still debt-overburdened third 
world, as long as it is obliged to run an 
export surplus itself. Only Western 
Europe, Japan, and the socialist coun­
tries remain, but»'not likely as poten­
tial importers of such American export 
surpluses. Alternatively, Americans 
could reduce their debt service by re­
ducing or devaluing their foreign 
debts. One mechanism is through de­
flationary write downs and bankrupt­
cies or renuiciation of part of the debt, 
presaged by the Wall Street crash. 
Another way to devalue dollar deno­
minated debts is to devalue the dollar 
itself, as in the recent past and the 
foreseeable future. A third way, would 
be through domestic inflation, which 
would reduce the real value of the 
debts directly, as well as indirectly by 
contributing to further devaluation of 
the dollar itself. Of course, each of 
these or any combination of these pos­
sible American responses to its foreign 
debt also has important deflationary 
effects on America's European and Ja­
panese creditors. Thus, any attempt to 
square the international financial and 
economic circle of interest and ex­
change rates, and budget and trade de­
ficits at this juncture must fail in 
something and entail serious costs in 
terms of economic growth and wel­
fare. What is to replace the United Sta-

. tes as the global borrower and spender 
of last resort, especially when it is 
most needed? Total irresponsibility 
during the Reagan Recovery since 
1983 has created a Catch 22 situation, -
whtaever you do. Damned if you do Therefore in a previous article, this 
and demand if you don't. author has examined some of the alter-

The post-war system of interna- native developments and in particular 
tional finance and world trade as we the possible resurgence of neo-mercan-
know it may therefore become unsus- tilism and the reemergence of financial 
tainable as American hegemony over it zones or even economic blocs. Recent 
declines in the still deepening present losses at American roulette and the 
world economic crisis. Yet no other present troubles in the globonomic 

- power is ready to replace the United casino now make these posibilities all 
States, and international - let alone su- the more likely, 
pernational-coordination appears be­
yond immediate reach. Courtesy:£conoff«7? and Political Weekly 

12. E C O N O M I C R E V I E W D E C E M B E R 1 9 8 7 

t