20TH-CENTURY CAPITALISM For most of the 20th century capitalism has been buffeted by wars, revolution, and depression. World War I brought revolution and a Marxist-based communism to Russia. The war also spawned the Nazi system in Germany, a malevolent mixture of capitalism and state socialism, brought together in a regime whose violence and expansionism eventually pushed the world into another major conflict. In the aftermath of World War II, Communist economic systems took hold in China and Eastern Europe. However, as the cold war came to an end in the 1980s and the former Soviet-bloc nations turned to free enterprise (though with mixed success at first), China was the only major power to retain a Marxist regime. Many of the developing nations, strongly influenced by Marxist ideas in the early postcolonial period, turned to a modified form of capitalism in their search for answers to economic problems.

In the industrial democracies of Western Europe and North America, the sharpest challenge to capitalism came in the 1930s. The Great Depression was by far the most severe economic upheaval endured by modern capitalism since its beginnings in the 18th century. Contrary to the logic of Marx's prophecy, however, Western nations failed to collapse into revolution. Rather, in meeting the challenge of the Depression, these capitalist systems demonstrated remarkable abilities for survival and adaptability to change. Democratic governments began to intervene in the economy to correct the worst abuses inherent in capitalism.

In the U.S., for example, the New Deal administration of President Franklin D. Roosevelt restructured the financial system so as to prevent a repeat of the speculative excesses that had led to financial collapse in 1929. Action was taken to encourage collective bargaining and build a strong labor movement in order to offset the concentration of economic power in large industrial corporations. The foundation for the modern welfare state was laid through the introduction of social security and unemployment insurance, measures designed to protect people from the economic hazards endemic to a capitalist system.

The most important intellectual event in the development of contemporary capitalism was the publication by the British economist John Maynard Keynes of General Theory of Employment, Interest and Money (1936). Like Adam Smith's ideas from an earlier era, Keynes's thought profoundly affected the way in which capitalism worked in Western democracies.

Keynes demonstrated that it is possible for a modern government to use its powers to spend money, vary taxes, and control the money supply in ways that can dampen down, if not eliminate, the age-old curse of capitalism-cycles of "boom and bust." According to Keynes, in a depression, government should increase its spending, even at the cost of unbalanced budgets, to offset the decline in private spending. The process should be reversed if a boom threatens to get out of hand, leading to excessive speculation and inflation. The Keynesian viewpoint became incorporated into U.S. law when Congress passed the Employment Act of 1946. This act, which committed the American government to maintaining high levels of employment and production, is a legal landmark representing the formal abandonment of laissez-faire as national policy.

Word Count: 515