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TWO SYSTEMS

EUGEN VARGA AS STALIN’S FAITHFUL PROPAGANDIST


1937-1939

ANDRÉ MOMMEN

CEPS
MAARSSEN
APRIL 2010
Introduction

With the rising tide of the Popular Front and Hitler’s aggressive foreign policy
, Eugen Varga’s role and attitude changed considerably. As Stalin’s faithful pro
pagandist was praising the merits of socialism and denouncing capitalism’s inabi
lity to secure economic growth. In addition, Varga’s institute specialized in st
udying some recent changes having occurred the main capitalist countries, especi
ally in the US where the New Deal had broken with laissez-faire capitalism or th
e prospects of Hitler’s economic reforms. However, he still believed that no rea
l recovery was possible and that stagnation at a low level of production with sm
all recoveries was the irremediable fate of capitalism.
From now on, Varga kept on publishing books and articles commissioned by the Cen
tral Committee’s propaganda department. His book Two Systems published in 1937,
which was destined to a large public in the US, had to promote the realizations
of the Soviet regime and to stress capitalism’s inability to cope with the econo
mic crisis.
Nazism and New Deal
In 1933 and 1934 s slight economic recovery was signaled, especially in Nazi Ger
many and New Deal’s US. Would there be a cyclical upswing necessarily postponin
g the attended breakdown of capitalism thanks to interventionism of the capitali
st state creating an outlet on domestic ‘market’. Or was capitalism nonetheless
creating its own market? Soviet economists were unable to answer these questio
ns. Varga maintained that the economic upswing of that period had to be attribut
ed to ‘internal forces’. Finance capital was however unable to continue ruling i
n the old way. It had mobilized the petty-bourgeois masses against the working c
lass with the aid of slogans against predatory capital. Soviet analysts qualifie
d Roosevelt’s National Recovery Act (NRA) as an astute supported by big business
in order to distribute ‘reasonable profits’ to monopoly capital. Hence, Varga d
enounced NRA as a form of ‘disguised Fascism’. He identified the Agricultural Ad
justment Act as a twin of Hitler’s Hereditary Farm Act increasing agricultural p
rices. His colleague V. Lan (Kaplan) discovered in the close collaboration betwe
en industrialists and trade unions a form of fascism. Lajos Magyar argued that
replacement of fixed capital had to occur at the end of the depression. Hence, s
tate subsidies to finance capital were discouraging the normal recovery process.
Magyar claimed that recent signs of economic recovery could only have been puls
ed by a ‘military-inflationary boom’. His colleague M. Yuelson adhered to this
idea and proposed to use it as an analytical category, that was, however, nothin
g else than Hilferding’s ‘organized capitalism’.
At the Thirteenth Plenum of the ECCI in November-December 1933, Kuusinen shared
that opinion. He argued that the revival of industry was bearing the characteris
tics of military-inflationary expenditures. In his speech to the Thirteenth Ple
num, Varga, who did not believe in the possibility of a real economic recovery,
thought that the internal mechanisms working in accordance with the laws of cap
italism to overcome every cyclical crisis were not strong enough owing to the pr
essure of the general crisis of capitalism. Hence, bourgeois optimism about an e
conomic upswing was therefore unfounded and inspired by a recent ‘crisis rationa
lization’. Profits were rising because of low wages paid, diminished earnings o
f the peasants, plundering of the state budget, subsidies, war production, etc.
Excess productive capacity still constituted an unsurmountable obstacle to new
investments that depended on higher consumption, thus on the volume of purchasin
g power. Expansion of the market was impossible as there were in the colonies n
o additional groups of peasants to be exploited. Apparently, Varga had returned
to the imperialism theory of Rosa Luxemburg and Fritz Sternberg, but in the mean
time he preferred quoting from Lenin’s The Development of Capitalism in Russia
which contained an analogous explanation.
Stalin did not share Varga’s opinion. At the Seventeenth Party Congress in Janua
ry 1934, he warned in his report for those people inclined to adhere entirely to
the concept of the ‘military-inflationary boom.’ Stalin: ‘Such an explanation w
ould be incorrect, if only for the reason that the changes in industry which I h
ave described are observed, both in separate and chance districts, but in all, o
r nearly all, the industrial countries, including the countries with a stable cu
rrency. Apparently, in addition to the war and inflation boom, the internal econ
omic forces of capitalism are also operating there.’
Varga was still clinging to his “law”, when referring to the devastating effects
of ‘crisis rationalization’ on employment. Artificial state initiatives could n
ot reverse this tendency. They only lead to a sudden relapse, which was illustra
ted by the recent economic setback at the end of 1933 in the USA. Varga felt ba
ck on his theory that the current crisis was not a ‘normal depression’, but one
of a ‘special kind’. Meanwhile, Varga’s Institute of World Economy and World Po
litics was analyzing of Roosevelt’s New Deal and the development of American mon
opoly capitalism. Sergey Dalin and Esfir Gurvich denied capitalism’s capability
of planning economic growth when pointing to financial capital domination.
However, this kind of analysis did not meet the aspirations of the American Comm
unists who had joint a Democratic Front with all progressive forces. At a Politb
uro meeting in November 1937, Earl Browder claimed that this recession was not a
necessary development and that the roots of the crisis were political, not econ
omic. Browder accused monopoly capital of a power play to cancel the mandate of
the people. He won Dimitri Manuilsky’s Comintern endorsement of his pro-Rooseve
lt policy views on purely pragmatic grounds. Then, Varga did an about-face, arg
uing that the recession was ‘largely due to political factors’ such as ‘the deli
berate sabotage of the most reactionary sections of the United States bourgeoisi
e’.
Varga’s dilemma was clear when Roosevelt’s Planning Board expanded its scope to
include a variety of investigations into public works, natural resources conserv
ation, the impact of technology, declining population, and the structure of the
American economy. Using the Planning Board as an elite group of policy advisers,
a strong president such as Franklin Roosevelt could bring together the varied e
conomic interest groups (industry, labor, agriculture, and the professions). Th
ough Varga remained critical to Roosevelt’s planning activities, he was also imp
ressed by American capitalism’s capacity to recover from the slump.
The USSR and the capitalist world
After the Seventh Congress of the Comintern in 1935, Varga became closely associ
ated with Stalin’s foreign propaganda. Two publications, Two Systems - Socialist
Economy and Capitalist Economy , and The U.S.S.R. and the Capitalist Countries,
saw the daylight. These publications deserve some attention as they were suppo
sed to popularize the achievements of the Soviet system and to promote socialism
as an alternative to capitalism, but this time without preaching the proletaria
n revolution. In 1938 Varga authored with Stalin’s private secretary Lev Mekhlis
and V. Karpinsky a propagandistic book The U.S.S.R. and the Capitalist Countri
es hailing the Soviet Union as an economic great power. Its main author was Varg
a, who took parts from his earlier writings or reports. In this poorly edited pa
mphlet the three authors explain that under capitalism planning is possible and
that monopoly capitalists are responsible for low agricultural prices.
In his own contribution, Varga argued that the crisis of 1929-33 and its ‘unprec
edented duration’ had to be explained ‘by the fact that this crisis occurred und
er the conditions of the general crisis of capitalism.’ Varga paid much attenti
on to the new economic crisis of 1937. This new crisis proved that the bourgeois
ie could not hope for better times. He noticed that the American capitalists wer
e forced for the first time to sign collective agreements with the recently orga
nized workers in heavy industries. According to Varga the average amount of comm
odities per capita was lower than it was before the war and that at the same tim
e an enormous portion of the means of production are unutilized. Because the peo
ple had no money to buy goods and wealth was being concentrated to an ever great
er degree in the hands of a few people, ‘capitalism has become a hindrance to th
e development of mankind. If mankind is to advance, the rule of the bourgeoisie
must be overthrown.’
In a chapter on the hard lot of the peasantry in capitalist countries is reveale
d that the peasantry was still dissatisfied with the unfair distribution of the
land and they were forced to market their goods for a pittance. A host of middle
men, merchants and big capitalists were standing between the peasant and the con
sumers and taking all the profit, ‘ruining the peasant and robbing the urban con
sumer.’ In his contribution, Varga focused on the situation of the German peasa
ntry as well. The Fascists, who were preparing for war, had ‘deprived peasants o
f the right to sell their produce. Fascist officials taking all the grain, cattl
e, meat milk, vegetables and eggs from the peasantry, left the latter with barel
y enough to feed their families. Optimistically, Varga argued that the ‘toiling
peasants of Germany carry on a fierce and persistent struggle against the fascis
t regime which dooms them to poverty and starvation’. He hailed the brave stand
of the Spanish people against Fascism. He admitted that ‘bourgeois democracy, h
alf-hearted and scanty though it be in comparison with socialist democracy, is a
t any rate better than fascist terror. That is why the proletariat marches at th
e head of the united people’s front’.
Two Systems
The central thesis in Varga’s particularly well-written Two Systems (its origina
l title was 20 Years of Capitalism and Socialism) is that capital was no longer
in a position either to utilize the productive forces it had created or to give
the proletariat opportunity to work, while under the dictatorship of the proleta
riat in the Soviet Union the productive forces were developing at an incomparabl
y quicker rate than in capitalism. In Varga’s synthesis the Soviet Union had gr
own under ‘the great leader of the peoples, Joseph Stalin, a socialist society’
to the status of an industrial and military power, while during the same period
two deep and severe economic crises, lasting depressions, etc. were feeding the
deep ‘dissatisfaction of vast masses of the working people with the capitalist s
ystem’. Hence, the rising tide of the revolutionary movement could only be repr
essed by using fascist methods.
This textbook contains long Marx, Lenin and Stalin quotations, attacks on Trotsk
yists, pedantic endnotes and statistical evidences underpinning Varga’s argument
s about the superiority of socialism over capitalism. Due to a slowing down of r
eal accumulation enormous sums of money “saved” cannot be turned into productive
capital. Lenin’s thesis that under influence of monopoly capital capitalism is
decaying, was ‘falsified by various Trotskyists, who afterwards turned traitors
to socialism and to their own country.’ According to Varga, Lenin’s fundamenta
l conception was that imperialism is a “superstructure” on capitalism, that ther
e is no “pure imperialism”. Varga argued that Lenin rejected as anti-Marxist ‘bo
th the all-embracing “general cartel” of Hilferding, as well as the Bukharinite
idea of “organized capitalism”.’ Obviously, Varga was well aware of the role of
military production since the outbreak of the economic crisis of 1929. Whole br
anches of industry with military importance were depending on state subsidies. H
owever, Varga refrained from further investigating the effects of military spend
ing. He pointed to the fact that ‘technical advance was restricted’ now that the
authorities forbade the utilization of machines while low wages made ‘technical
innovations less profitable’, but due to the introduction of machinery develop
ment was more rapid in the Soviet Union than anywhere.
Varga refers to problems typical for capitalism’s retarded development caused by
the narrow limits set by the power of society to consume on the sale of the goo
ds produced in division two and also on the sale of goods of division one. ‘On a
yearly average, industrial production in the Soviet Union has risen by 29 per c
ent since 1920; in the capitalist world by 2.7 per cent.’ More important, he al
so notes the complete independence of the development of the economy of the Sovi
et Union from the cyclical movement of production of the capitalist world’, as w
ell the fact that criminal elements ’had made ‘desperate attempts to put obstacl
es in the way of victorious socialist construction’. He argued that the possibi
lity of the increase of production in a socialist society extending over the wor
ld was ‘practically limitless’. Varga was not blind for the fact that inequalit
ies in the development of separate branches of industry was important and that p
roduction in ‘old industries’ was stagnating since the First World War, while pr
oduction in the new branches of industry had risen rapidly. In line with his ea
rlier analysis of capitalism, Varga blames the bourgeoisie for being incapable o
f utilizing the material productive forces it had created. That was no accidenta
l phenomenon, he argued, but followed of necessity from the inner development of
capitalism. In the Soviet Union the utilization of the existing productive pla
nts and the output of labor were incomparably better than under capitalism, as h
ere were never any market difficulties or work stoppages. Thus, this proved the
‘tremendous superiority of the Soviet over capitalism’. Varga hailed the rise a
nd spread of the Stakhanov movement as an important stage in the realization of
socialism. However, Varga also admitted that the average output of the Soviet wo
rkers was still below the average output of the workers in the technically most
advanced capitalist countries. But the output of the Stakhanovites was definitel
y higher in the Soviet Union.
Chronic mass unemployment under capitalism and the creation of an industrial res
erve army was a necessary product of accumulation and at the same time a conditi
on of existence of the capitalist mode of production. ‘But in the period of the
general crisis this quantitative increase of the industrial reserve army turned
into a qualitative change’. According to Varga this chronic mass army of the un
employed were superfluous ‘not only for the usual but also for the greatest self
-expansion of capital’. Therefore, an important part of the labor force would r
emain permanently unemployed. Varga reintroduced his already previously formulat
ed ‘law’ that there was ‘a tendency towards an absolute reduction in the number
of productive workers, i.e., workers who directly create value and surplus value
.’ But this time he also admitted that the number of employed in the ‘unproduct
ive’ occupations (trade, banks, domestic services) had increased at the same tim
e. Hence, Varga concluded that due to the parasitic nature of capitalism in the
period of the general crisis human labor power was only partly used. He returned
to his underconsumptionist thesis when asserting that under capitalism workers
can only find opportunity to work when the goods produced by them can be sold as
commodities at their price of production. Varga: ‘This is far from being always
the case, since under capitalism there is a standing contradiction between the
drive of capital to extend production and the narrow limits of the consuming pow
er of society.’ In the period of the general crisis of capitalism capital was n
ot able anymore to guarantee its workers existence, which was the best proof tha
t the capitalist system would succumb in the fight with socialism. ‘The period o
f the general crisis of capitalism is therefore the period of the social revolut
ion, as the victory of socialism on one-sixth of the globe clearly shows’ , he c
oncluded.
With the decay of free-market capitalism by imperialism the peaceful path of sol
ution of the market problem had been closed and accumulation problems had increa
sed. Limited consumer power of the proletariat also put limits to the sale of th
e means of production. However, Varga had to explain why the problem of the mar
ket had become particularly acute in the period of the general crisis. He tried
to solve this problem by the narrowness of the market and the factors making the
problem of the market more acute in the period of the general crisis. First of
all, capitalism had to draw independent producers of the world into the capitali
st market in order to expand its market by transforming the peasantry into a rur
al proletariat. In the period of the general crisis this process had as good as
stopped, the conquest of colonies had come to an end, the time of great railway
construction was past, the export of capital had diminished for a great deal. In
addition, monopolies restricted the power of society to consume by wage reducti
ons and by keeping selling prices high.
Varga rejected the objection that the consumption power of society taken as a wh
ole would not shrink under monopoly capitalism: ‘The concentration of enormous s
ums of surplus value by the monopolies, in the hands of the finance oligarchy, l
eads to a diminution of the power of society to consume, because the finance oli
garchy – in spite of the wild luxury they go in for – can only use for private c
onsumption a small portion of the enormous profits they acquire’. In addition,
the monopolies owned enormous masses of accumulated money for which they could n
ot find investment opportunities. Whereas in an early stage of capitalism the pr
oblem of the market was only acute in the phases of crisis, in the period of the
general crisis of capitalism it had the tendency to become chronically acute. T
he chronic agrarian crisis could be catalogued as a component of the general cri
sis of capitalism, because of the severe restriction of demand by the urban popu
lation. This chronic agrarian crisis could lead to a reduction of agricultural p
roductive forces, to a degradation of agriculture, thus ‘to the mass ruin of the
working peasantry in the capitalist world.’ Varga noticed an increase of the r
ole of the state and propaganda for autarchy now that the market possibilities w
ere insufficient. The bourgeoisie tried to monopolize to the fullest extent poss
ible the home market by imposing bureaucratic controls on foreign trade transact
ions. This growing tendency to protectionism was reflected in a reduction in the
volume of world trade. But Varga also noticed that the reduction in the volume
of foreign trade was accompanied by industrialization in some Latin American cou
ntries where cotton spinning was introduced. State regulation of capitalist econ
omy had increased in order to monopolize the home market, but also to relief the
enterprises endangered by the crisis. Measures for temporary alleviation of the
dissatisfaction of the masses were taken simultaneously with measures of advant
age to monopoly capital. ‘The aim of the New Deal consisted first and foremost i
n holding the farmers and workers off from revolutionary mass action. (…) under
the cover of social demagogy, the New Deal gave the big bourgeoisie everything t
hat they needed: billions from the state treasure for the relief of bankrupt ent
erprises, not only getting rid of existing legal obstacles to the formation of t
rusts, but positive advantages for the formation of monopoly by forced trustific
ation laid down in the codes, prohibition of the construction of new works, mini
mum prices laid down by the state, etc.’ The sudden increase in expenditures on
armaments coincided with the transition from depression to revival. However, Va
rga denied that capitalism could ever eliminate crises by simply multiplying arm
ament expenditures. If armaments were financed by an equally large increase in t
axes affecting the masses, then there would be no extension of the market. A rea
l expansion of the market could be obtained by borrowing capital lying fallow. I
n addition, the agitation for a planned economy in capitalism aimed at making th
e workers believe that a capitalist planned economy was possible. But the indisp
ensable condition of a successful planned economy was the elimination of profit
as the moving force of production. ‘The discoverer of this demagogy was de Man,
who with his plan actually succeeded in blurring the antagonism between the righ
t- and left-wings of the Belgian Labour Party for a time, and diverting the diss
atisfaction of the workers into a reformist channel by the “fight for the Plan”
(which he shamefully betrayed when the longed-for opportunity presented itself o
f becoming a minister in a bourgeois cabinet).’ In addition, the agitation for
planned economy in capitalism was seeking ‘to dampen the revolutionizing effect
of the crisis-less, successful construction of Soviet economy’.
According to Varga, the laws of capitalist reproduction led to a relative and ab
solute impoverishment of the proletariat. Due to increased productivity the work
er received an ever-decreasing share of the values produced by him. Absolute imp
overishment of the proletariat occurred because capital strives to force wages b
elow the value of labor power. However, Varga indicated that the absolute impove
rishment of the proletariat went with ‘interruptions, in continual struggle betw
een capital and proletariat’. In the period of the general crisis of capitalism
and chronic mass unemployment supply of labor power gave capital the possibilit
y of a drive against wages. But Varga also noticed that in the fascist countries
state power prevented any legal defense against capital, while in the United St
ates and France the political and legal conditions were more favorable than in o
ther capitalist countries. In addition, Varga attacked ‘bourgeois statistics’ be
ing completely useless with regard to the development of the position of the wor
king class, for resolving the question whether and how far an absolute impoveris
hment of the proletariat was taking place.
In his chapter on the mass ruin of the peasantry under capitalism, Varga focused
on high monopoly prices for manufactured goods which they had to purchase, and
the considerable fall in agricultural prices. The “scissors” (difference between
industrial and farm prices) having become an ever-heavier burden for the peasan
try, led to their ruin. He noticed that the rich peasants had various possibilit
ies of partially transferring the burden of the crisis to the poor strata of the
village dwellers. ‘Most terrible of all is the situation of the poor peasants,
who constantly depend on extra-earnings from wages, and who cannot find any work
because of the chronic mass unemployment’. Varga pointed to the fact that in H
ungary, just as in Italy, unemployment among agricultural workers was so tremend
ous that the government had forbidden the use of harvesters. In the Soviet Unio
n, an entirely new peasantry, such as had not previously existed in the history
of mankind, had emerged after collectivization: ‘a happy peasantry, living in pe
ace and joy, shedding its private economic peasant skin and merging with the wor
king class’.
A chapter on the national and colonial question analyzed how the bourgeoisie of
the dominating nation oppressed national minorities in Europe. National oppressi
on was particularly heavily on the intellectuals, Varga added, because they had
‘to deny their nationality or renounce any state post. The greater the unemploym
ent among the intellectuals, the more membership in the ruling nationality is us
ed as a weapon in the fight to live. In many cases the fight goes over into the
sphere of religion. The Germans of Jewish faith were subjected to the bitterest
persecution as a foreign “race” in order to get rid of them as competitors.’ He
nce, Varga concluded that national freedom and equal rights were impossible in b
ourgeois society and that national oppression was hindering the cultural develop
ment of peasants and workers. After the World War, the colonies were re-divided.
England appropriated the lion’s share, but this post-war agreement only would l
ast until 1931 with Japan’s attack on Manchuria. How to explain the Kuomintang’s
behavior in the development of the Chinese revolution? Varga argued that the Ku
omintang wanted a bourgeois anti-imperialist movement, and therefore it broke wi
th the Comintern. Varga: ‘The further development of the Chinese and particularl
y the Indian national movement for emancipation clearly show the danger that a n
ational movement led by the bourgeoisie loses its striking force and makes compr
omises with the imperialist bourgeoisie at the expense of the masses of working
people.’
Varga argued that the general crisis of capitalism had brought about a further w
orsening of the living conditions of the colonial population, because the coloni
es had to get their manufactured goods to an even greater extend from the mother
country while the big monopolies were forcing down the prices of raw materials.
As a result of the economic crisis, demand for colonial raw materials had dropp
ed considerably. Hence, he concluded that imperialism had succeeded in easing th
e position of its industry at the expense of the peasants in the colonies and th
at ‘the agrarian revolution’ was the ‘only way out of the miserable condition of
many hundreds of millions of colonial peasants’. Varga admitted that in the co
lonies an alliance of the local landlords with the imperialists against the peas
antry was a fact and that the ‘big bourgeoisie’ had become ‘altogether reactiona
ry’ supporting the conservative elements in the colonies in order to perpetuate
pre-capitalist forms of exploitation. But he also pointed to the nascent native
bourgeoisie in the colonies involved in certain branches of the consumption ind
ustry which was gradually bringing with it the development of ‘native capital, o
f a native bourgeoisie.’ New perspectives appeared now that the native bourgeoi
sie tried to develop local industries. The further development of native industr
ies was, however, hampered by the narrowness of the local market and the poverty
of the colonial peasantry. Therefore, the native bourgeoisie had a direct inter
est in changing the feudal agrarian constitution restricting the development of
the domestic market. But with the development of domestic industry, an industria
l proletariat also developed.
In contrast, after the October Revolution the Soviet power united the nations in
a nationally united territory. The privileged position of the Russian language
was abolished and ‘full right of separation’ for the Union Republics and the Aut
onomous Republics existed. Varga argued, that the ‘results of centuries of natio
nal oppression could not be set aside at one blow’. The new Soviet Constitution
was the crown of the equal rights of nations, though remnants of Great-Russian
chauvinism and anti-Semitism still existed. The young people growing up in the S
oviet Union were now all free from chauvinism, anti-Semitism and fascism.
In his final chapter, Varga discussed bourgeois democracy. ‘Bourgeois democracy,
in comparison with all reactionary forms of domination of the exploiting classe
s, is an achievement; it is an evil in comparison with the dictatorship of the w
orking class, which – as Lenin emphasized- is many times more democratic than th
e most progressive forms of bourgeois democracy.’ He warned for the illusion th
at reformism could lead to a peaceful transition to socialism or that the entry
of Social-Democratic leaders into the state apparatus meant the beginning of soc
ialism. In the period of the general crisis of capitalism the financial oligarch
y wanted to abolish bourgeois democracy and to erect an openly violent form of i
ts dictatorship. Because of the unequal development in the different countries,
some countries were experiencing fascism, while elsewhere a struggle between fas
cism and democracy was fought out, taking more and more ‘the character of a worl
d battle between the forces of fascist reaction and of progress.’ Though in the
United States and England the bourgeoisie was defending in words democracy agai
nst fascism, the ‘undermining of bourgeois democracy’ was already in play. Varg
a argued that in the victorious countries at the outcome of the World War, the a
pparatus of force had remained more or less intact, but that in the defeated cou
ntries the authority of the ruling classes had been shattered and that the petty
bourgeoisie had been embittered. In line with Dimitrov, Varga believed that the
accession to power of fascism was ‘by no means inevitable’. ‘It would undoubted
ly have been possible to prevent the victory of fascism if the working class had
not been split by the reformist leaders and its resistance weakened.’ But he
rejected its responsibility on the opportunist leaders of Social Democracy and t
he trade unions having split the working class while cooperating with the big bo
urgeoisie.
In this aseptic exposé Varga attacked several times Trotsky, Kautsky and Hilferd
ing. But the names of foreign politicians (Hitler!) were omitted and very little
attention was paid to the fascist economies. No calls for revolutionary uprisin
gs were uttered. The “subjective factor” was missing and the role of the Communi
st parties outside forgotten. Varga’s jerky and sloppy style had received a spec
ial treatment by a not further mentioned editor. When criticizing notorious enem
ies of Socialism, Varga’s tone remained moderate, but the evils of Fascism were
criticized in particular harsh and sincere terms.
Stalin’s analysis of the economic crisis
Internationally, the Soviet government had participated since 1934 in the strugg
le for collective security promoted by the League of Nations, but this tactic ha
d led to little success. Alarming was Hitler’s annexation of Austria in March 19
38, while in the west Social Democratic parties became more and more inclined to
neutralism or pacifism. In September 1938, Stalin discovered that ‘the unwritte
n maxim of Munich was to keep Russia out of Europe’ and to reorient Hitler’s ex
pansion into eastern direction. On 15th March 1939, during the Eighteenth Party
Congress, Hitler’s Wehrmacht marched into Czechoslovakia. Just five days earlier
, Stalin had announced in his ‘chestnut speech’ what his attitude would be in t
he next crisis. Stalin declared that ‘it looks very much as if this suspicious n
oise is designed to incense the Soviet Union against Germany without any visible
grounds […] the Soviet Union is not willing to pull chestnuts out of the fire f
or anyone else.’ The ‘suspicious noise’ was a reference to Western accusations t
hat Germany was aiming to create an independent Ukrainian State. Stalin told hi
s audience that a new imperialist war was already in its second year, a war wage
d over a huge territory stretching from Shanghai to Gibraltar, and involving ove
r 500 million people.
Stalin’s report contained a chapter on the international economic crisis that wa
s largely inspired by Varga’s writings. Stalin argued that the economic crisis b
roken out in the latter half of 1929 had lasted until the end of 1933. After tha
t the crisis passed into a depression, and was then followed by a certain reviva
l, a certain upward trend of industry. But this upward trend of industry had not
developed into a boom, as was usually the case in a period of revival. In stead
, in the latter half of 1937 a new economic crisis had begun which seized first
of all the United States and then Britain, France and a number of other countrie
s. The capitalist countries thus found themselves faced with ‘a new economic cri
sis before they had even recovered from the ravages of the recent one. (…) the p
resent crisis is not universal, but as yet involves chiefly the economically pow
erful countries which have not yet placed themselves on a war economy basis. As
regards the aggressive countries, such as Japan, Germany and Italy, which have a
lready reorganized their economies on a war footing, they, because of the intens
e development of their war industry, are not yet experiencing a crisis of over-p
roduction, although they are approaching it. This means that by the time the eco
nomically powerful, non-aggressive countries begin to emerge from the phase of c
risis the aggressive countries, having exhausted their reserves of gold and raw
material in the course of the war fever, are bound to enter a phase of very seve
re crisis.’
Recalling that a serious economic crisis was developing, Stalin reproduced a tab
le showing that in Italy and Japan, who had placed their national economies on a
war footing earlier than Germany, the downward course of industry already had b
egun in 1938. Germany, which reorganized its economy on a war footing later tha
n Italy and Japan, industry was still experiencing a small upward trend. Stalin
argued that German industry must enter the same downward path as Japan and Italy
had already taken. For Stalin an economy of a country on a war footing meant gi
ving industry ‘a one-sided, war direction; developing to the utmost the producti
on of goods necessary for war and not for consumption by the population; restric
ting to the utmost the production and, especially, the sale of articles of gener
al consumption -- and, consequently, reducing consumption by the population and
confronting the country with an economic crisis.’
Stalin’s report to the Eighteenth Congress of the CPSU(B) drew an alarming pictu
re of the development of world-economic conditions. It was clear that a new eco
nomic crisis was developing in the aftermath of a certain revival. Stalin conclu
ded in his report that capitalism possessed less more reserves to combat the eff
ects of the crisis, which developed now much more unevenly because of the switch
ing over of national economy to a war basis. The fascist states had delayed the
outbreak of a crisis in these states. For that reason the new crisis would be mu
ch worse than the previous one and it would be more protracted.
Stalin noticed that such an unfavorable turn of economic affairs could not but a
ggravate relations among the powers. The preceding crisis had already mixed the
cards and sharpened the struggle for markets and sources of raw materials. The s
eizure of Manchuria and North China by Japan, the seizure of Abyssinia by Italy
-- all this reflected the acuteness of the struggle among the powers. The new ec
onomic crisis was bound to lead to a further sharpening of the imperialist strug
gle. It was no longer a question of competition in the markets, of a commercial
war, of dumping. These methods of struggle had long been recognized as inadequat
e. It was now a question of a new re-division of the world, of spheres of influe
nce and colonies, by military action. Stalin identified three aggressive states:
Japan, Germany and Italy. ‘But war is inexorable’, Stalin exclaimed. It was a
distinguishing feature of the new imperialist war that it had ‘not yet become a
universal, a world war.’ Stalin saw an open re-division of the world and sphere
s of influence at the expense of the non-aggressive states, without the least at
tempt at resistance, and even with a certain connivance, on their part. Stalin’s
strategic problem was how it had happened that the non-aggressive countries, wh
ich possessed such vast opportunities, had so easily and without resistance aban
doned their positions in order to please their aggressors.
Stalin attributed the weakness of the non-aggressive states to the fear that a r
evolution might break out if the non-aggressive states were to go to war and the
war were to assume world-wide proportions. In addition, they had rejected the p
olicy of collective security, the policy of collective resistance to aggressors,
and had taken up a position of non-intervention, a position of “neutrality.” St
alin understood that the policy of non-intervention had revealed ‘an eagerness,
a desire, not to hinder the aggressors in their nefarious work.’ But Stalin also
remarked that Japan was free to embroil itself in a war with China, ‘or better
still, with the Soviet Union’. Germany was not hindered from enmeshing itself in
European affairs, ‘from embroiling itself in a war with the Soviet Union’. On
the second day of the Eighteenth Party Congress, Manuilski explained what had ch
anged since the previous congress. Like Stalin, Manuilski asserted that between
1929 and 1933 capitalism had lived a depression of a special character with a sh
arpening of imperialist antagonisms that were announcing a new imperialist war.
According to him, the British bourgeoisie had delivered at Munich Czechoslovaki
a to Fascism and he repeated that the English-French government was diverting Ge
rman Fascism into eastern direction.
On 1 May Dimitrov’s speech had warned the British and French reactionaries for a
llowing the fascist regimes to attack the Soviet Union. Then, Litvinov was repl
aced by Molotov at Foreign Affairs. Molotov, who had no experience in internatio
nal affairs, was not well fit for that job. Some officials in the Comintern mis
interpreted that appointment. Gyula Alpári still believed in an international an
ti-fascist congress to be convened later that year. On 11 May 1939, Izvestiya c
learly explained that because of geographical circumstances the Soviet Union wou
ld have to bear all the weight of an eventual war.
In those days, Comintern functionaries tried to interpret Stalin’s “chess nut” s
peech correctly. Jürgen Kuczynski tried to analyze the character the new econom
ic downturn in Great Britain and France in relation with the falling purchasing
power of the population and in comparison with the situation in Germany (but al
so Italy and Japan) where the state had reorganized the economy on a war basis b
y emitting special bills. Meanwhile, production of consumer goods was kept down
and inflation repressed. Kuczynski argued that a war economy ‘before the outbre
ak of a large-scale war’ was liable to an overproduction crisis ‘just like any o
ther form of capitalist economy.’ He warned that the fascist state - because of
its terrorist nature - was also able ‘to delay the outbreak of a crisis even lo
nger.’ The situation in a democratic capitalist state such as Great Britain was
different. Here, the overproduction crisis was already in full swing in spite o
f increased rearmament expenditures. Armaments expenditure was met from loans re
ducing the purchasing power of the population. He believed that a ‘people’s fron
t government’ could relieve the masses of much effort directed to the productio
n of armament goods.
The German-Soviet Non-Aggression Pact of 23 August 1939 (or Molotov-Ribbentrop A
greement) sent a shock wave across the communist world movement. After the pact
was made public, the communist parties ‘promptly’ expressed their solidarity wi
th Stalin’s diplomatic initiative in the hope this would contribute to safeguard
peace. In the mean time, the communist parties understood that Hitler’s fascism
would remain the most dangerous enemy. Hence, they believed that they could sta
y on their antifascist positions in the future. The outbreak of the Second Worl
d War a week after the inking of the treaty would change the political and milit
ary situation in Europe fundamentally. Meanwhile, Varga paid attention in his pu
blications to British politics and he even ordered a Russian translation of Her
mann Rauschning’s book Hitler Speaks in order to elucidate what Hitler’s real i
ntentions.
Conclusions
In the aftermath of the Seventh Congress of the Comintern Varga concentrated his
propagandistic work on defending Stalin’s industrialization and collectivizatio
n offensive and his foreign policy, including the Popular Front strategy of the
Comintern. Meanwhile, Varga believed in the fatal decay of capitalism now that t
he general crisis of capitalism had brought a further worsening of the living co
nditions of the working class, the peasantry and the toiling masses in the colon
ies. Reactionary forms of capitalist domination had succeeded bourgeois democrac
y in many countries, while even in the United States and Great Brittain the bour
geoisie was defending only in words democracy against fascism. At the Eighteenth
Party Congress in March 1939, Stalin’s speech was largely inspired by Varga’s a
nalysis of the international world economy, which proved that Varga’s position h
ad been considerably reinforced after the Great Purges during the previous years
.

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