WorldCom bankruptcy
Echoes of 1873 railroad industry collapse
By Gary Wilson
The bankruptcy of WorldCom has nothing to do with the crooks
that run it. That fact may surprise many who have relied on
media reports that leave the impression the failure is due to a
few "bad apples," as President George W. Bush put it.
Yet, that is the most important fact to know about the
WorldCom bankruptcy.
WorldCom is one of the biggest telecommunications companies
in the United States. It is the second-largest long-distance
telephone service provider in the country, carrying over 70
percent of Internet traffic, about 30 percent of consumer
long-distance phone service and 50 percent of all corporate
communications in the U.S.
Picking through the heap of reports on the bankruptcy, none
seem to get to the root of the matter. One report had something
a little different. It was a short item on National Public
Radio's Morning Edition July 23, interviewing a specialist on
the telecommunications industry, Scott Cleland.
Cleland said, "People look at WorldCom as a story of huge
corporate fraud, because it is a record-breaking amount of
fraud. But WorldCom was a one-dollar stock before the fraud was
discovered and it was going bankrupt before that."
Yes, WorldCom has been heading for bankruptcy for at least a
year.
Overproduction in fiber optics
More than a year ago, reports started to appear in the
business press about a "glut" in the telecommunications
industry. In particular, there was clearly overcapacity in
fiber optics.
By the beginning of 2002, telecommunications giants were
crumbling. The Feb. 17 New York Times reported:
"As an element of the telecommunications meltdown that has
come to light only recently, the market for fiber network
access seems to have been an important common ingredient in the
epidemic of accounting fiascos bursting out all over.
Certainly, it played a major role in the unraveling of Global
Crossing, which filed for bankruptcy protection last month.
Fiber swaps hurt other big communications companies, like Qwest
Communications International and Cable and Wireless. And they
played roles in the cascading problems of Enron and Tyco
International."
Actually, five of the 10 biggest bankruptcies in U.S.
history have all been within the last year and all are related
to the so-called overcapacity in telecommunications.
The five are:
(source: BankruptcyData.Com)
* WorldCom, with $103.9 billion in assets, bankrupt July
21
* Enron, with $63.3 billion in assets, bankrupt Dec. 2
* Global Crossing, with $25.5 billion in assets, bankrupt
Jan. 28
* Adelphia Communications, with $24.4 billion in assets,
bankrupt June 25
* NTL, with $16.8 billion in assets, bankrupt May 8
What happened?
A report in the Aug. 31, 2001, Business Week on "The
Fiber-Optic Glut" said:
"Since the 1980s, telecommunications companies have
deposited 283 million miles of optical cable into the ground,
according to fiber-optic consultancy KMI Corp. That cable
powers phone networks and the Internet, enabling most of the
high-speed communications of the Wired Age. Strung together,
those cables would circle the earth 11,320 times."
This glut was spurred on by high-level speculation among the
telecommunications giants, which began "swapping"
capacity--that is, selling future shares of capacity among
themselves.
This led to a speculative bubble that some have compared to
the tulip mania that gripped 17th-century Holland. Speculators
at that time drove the price of tulip bulbs up to the point
where a single bulb would cost several hundred dollars. That's
17th century dollars; the figure would be much higher today. So
of course everyone started planting tulips until suddenly the
market imploded.
That tulip mania was one of history's first capitalist
crises of overproduction.
1873 railroad glut led to depression
The Feb. 17 New York Times offers a different example for
today's crisis, though it too is an example of a capitalist
crisis of overproduction:
"One clue may lie in the history of the nation's railroads,
which are often compared to relatively young fiber optic
systems. Some fiber optic operators, like Qwest, even got their
start by laying fiber along existing rail lines," the Times
concluded.
"By now it is almost forgotten that railroad companies
expanded with ferocity in a post-Civil War boom that resulted
in a spectacular financial collapse called the Panic of 1873.
Many small investors were burned by the scandalous activities
of concerns like Union Pacific Railroad, which, like Global
Crossing, stretched the boundaries of corporate behavior in its
day."
Is that the only similarity? 1873 marks the beginning of one
of the worst capitalist depressions in history.
"In 1873, another economic crisis devastated the nation,"
writes Howard Zinn in "A People's History of the United
States." It was a depression that lasted for seven years, until
1880.
Zinn also notes that, "Crisis was built into a system which
was chaotic in its nature, in which only the very rich were
secure. It was a system of periodic crisis--1837, 1857, 1873
(and later: 1893, 1907, 1919, 1929)--that wiped out small
businesses and brought cold, hunger, and death to working
people while the fortunes of the Astors, Vanderbilts,
Rockefellers, Morgans, kept growing through war and peace,
crisis and recovery. During the 1873 crisis, Carnegie was
capturing the steel market, Rockefeller was wiping out his
competitors in oil."
These periodic crises, which the media calls overcapacity,
or a glut, are what Marx called overproduction.
Overproduction is a phenomenon unknown in history before
capitalism. Overproduction has nothing to do with needs or
wants of people. The crisis in telecommunications is not
because they can't find enough people who want access to
high-speed Internet connections and voice communications
systems.
There is no excess capacity, if you look at it from the
point of view of people's needs or wants. In fact, more
broadband Internet and telecommunications like that marketed by
WorldCom are being sold to more businesses and individuals
today than ever before. The demand has never been higher.
However, it is a crisis of overproduction. The crisis comes
from the fact that the telecommunications access can no longer
be sold for the rate of profit that the big owners of the
companies' stock are demanding. A few years ago, profit rates
were astronomical; now the profits are smaller. When the profit
margins start to decline, the rich withdraw and move their
money elsewhere to the higher profit rate that they expect.
That is the source of the crisis in the telecommunications
industry--a crisis of overproduction.
Falling rate of profit
This crisis is compounded, though, by a wider crisis in
capitalism, a crisis brought on by a generalized fall in the
rate of profit. This is the crisis that is being played out on
the stock market.
While a big capitalist will quickly move assets out of an
industry entering a crisis of overproduction into a different
industry altogether where profit rates are rising, not
declining, that is not so easily done when all businesses are
hit with a falling rate of profit. And falling profits are what
have forced the CEOs of so many corporations and banks to "cook
the books" in order to conceal the true situation they are
facing.
This is a crisis that looks similar to the Panic of 1873 and
the other periodic capitalist crises that occurred regularly in
the 1800s and the first half of the 1900s.
These periodic crises were the result of capitalist crises
of overproduction and a falling rate of profit. They plagued
the big capitalist countries until the end of World War II.
Only the socialist economy of the Soviet Union had managed to
break this cycle. In the struggle to overthrow Soviet
socialism, the capitalist powers used government spending to
lessen the impact of the continuing boom and bust cycle so
there was not the appearance of a steep recession or
depression.
It was a system of welfare for the rich as well as the
working class. But the system of welfare for the working class
has been dismantled in the post-Soviet period.
The MBA-in-chief and the business interests who control the
Congress are busy making sure that the interests of the rich
are protected. Bush and the Congress are writing laws to
introduce accounting reform. But there is no talk of protecting
the jobs or the retirement savings of the working people who
are losing everything to the crooks in big business and the big
banks.
Clearly, only independent intervention by the working class
will be able to protect their interests as this crisis
deepens.
Reprinted from the Aug. 1, 2002, issue of
Workers World newspaper
This article is copyright under a Creative
Commons License.
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