TWO SYSTEMS

EUGEN VARGA AS STALIN’S FAITHFUL PROPAGANDIST

1937-1939

ANDRÉ MOMMEN

CEPS

MAARSSEN
APRIL 2010

1
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 propagandist was
praising the merits of socialism and denouncing capitalism’s inability to secure economic
growth. In addition, Varga’s institute specialized in studying some recent changes having
occurred the main capitalist countries, especially in the US where the New Deal had broken
with laissez-faire capitalism or the prospects of Hitler’s economic reforms. However, he still
believed that no real recovery was possible and that stagnation at a low level of production
with small recoveries was the irremediable fate of capitalism.
From now on, Varga kept on publishing books and articles commissioned by the Central
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 economic crisis.

Nazism and New Deal

In 1933 and 1934 s slight economic recovery was signaled, especially in Nazi Germany and
New Deal’s US. Would there be a cyclical upswing necessarily postponing the attended
breakdown of capitalism thanks to interventionism of the capitalist state creating an outlet on
domestic ‘market’. Or was capitalism nonetheless creating1 its own market? Soviet
economists were unable to answer these questions. Varga maintained that the economic
upswing of that period had to be attributed to ‘internal forces’. Finance capital was however
unable to continue ruling in the old way. It had mobilized the petty-bourgeois masses against
the working class with the aid of slogans against predatory capital. Soviet analysts qualified
Roosevelt’s National Recovery Act (NRA) as an astute supported by big business in order to
distribute ‘reasonable profits’ to monopoly capital. Hence, Varga denounced NRA as a form
of ‘disguised Fascism’. He identified the Agricultural Adjustment Act as a twin of Hitler’s
Hereditary Farm Act increasing agricultural prices. His colleague V. Lan (Kaplan)
discovered in the close collaboration between industrialists and trade unions a form of
fascism.2 Lajos Magyar argued that replacement of fixed capital had to occur at the end of the
depression. Hence, state subsidies to finance capital were discouraging the normal recovery
process. Magyar claimed that recent signs of economic recovery could only have been pulsed
by a ‘military-inflationary boom’.3 His colleague M. Yuelson adhered to this idea and
proposed to use it as an analytical category, that was, however, nothing 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 characteristics of military-
inflationary expenditures.4 In his speech to the Thirteenth Plenum, Varga,5 who did not
believe in the possibility of a real economic recovery, thought that the internal mechanisms
1
Preobrazhensky had shown that capitalists surmounted crises not by discovering, but by creating new markets.
Richard Day, The ‘Crisis’ and the ‘Crash’. Soviet Studies of the West (1917-1939), London: NLB, 1981, p. 249.
2
Day, o. c., 1981, p. 260.
3
Day, o. c., 1981, p. 261.

2
working in accordance with the laws of capitalism to overcome every cyclical crisis were not
strong enough owing to the pressure of the general crisis of capitalism. Hence, bourgeois
optimism about an economic upswing was therefore unfounded and inspired by a recent
‘crisis rationalization’.6 Profits were rising because of low wages paid, diminished earnings
of the peasants, plundering of the state budget, subsidies, war production, etc. 7 Excess
productive capacity still constituted an unsurmountable obstacle to new investments that
depended on higher consumption, thus on the volume of purchasing power.8 Expansion of the
market was impossible as there were in the colonies no 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.9
Stalin did not share Varga’s opinion. At the Seventeenth Party Congress in January 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 would be incorrect, if only for the
reason that the changes in industry which I have described are observed, both in separate and
chance districts, but in all, or nearly all, the industrial countries, including the countries with
a stable currency. Apparently, in addition to the war and inflation boom, the internal
economic forces of capitalism are also operating there.’10
Varga was still clinging to his “law”, when referring to the devastating effects of ‘crisis
rationalization’ on employment. Artificial state initiatives could not reverse this tendency.
They only lead to a sudden relapse, which was illustrated by the recent economic setback at
the end of 1933 in the USA.11 Varga felt back on his theory that the current crisis was not a
‘normal depression’, but one of a ‘special kind’.12 Meanwhile, Varga’s Institute of World
Economy and World Politics was analyzing of Roosevelt’s New Deal and the development of
American monopoly capitalism. Sergey Dalin and Esfir Gurvich13 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 Communists
who had joint a Democratic Front with all progressive forces. At a Politburo 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 economic. Browder accused monopoly
capital of a power play to cancel the mandate of the people.14 He won Dimitri Manuilsky’s
Comintern endorsement of his pro-Roosevelt policy views on purely pragmatic grounds.
4
I. I. Kuzminov, Obnishchaniye trudyashchikhsya pri kapitalizme, Moscow: Izd. VPSh AON pri TsK KPSS,
1934, pp. 17-25.
5
Varga’s speech is reproduced in the stenographic report of the Thirteenth Plenum, 1934. XIII Plenum IKKI.
Stenograficheskiy otchet, Moscow: Partizdat, 1934, pp. 417-423.
6
Varga in Rundschau über Politik, Wirtschaft und Arbeiterbewegung, Vol. 2, No. 30, 25 August, 1933, p. 1132.
7
Ibidem.
8
Ibidem, p. 1116.
9
Lenin http://www.marxists.org/archive/lenin/works/1899/dcr8i/i8viii.htm#v03zz99h-064
10
J. Stalin, Problems of Leninism, Moscow: Foreign Languages Publishing House, 1947, p. 459.
11
Varga, in Rundschau über Politik, Wirtschaft und Arbeiterbewegung, 1934, Vol. 3, No. 18, 27 February, p.
665.
12
Eugen Varga, The Great Crisis and Its Political Consequences, London: Modern Books Limited, 1935, p. 73.
13
On this subject, Sergey A. Dalin and Esfir I. Gurvich published two books. Especially Gurvich’s book
published in 1937 reported in a purely Stalinist style on the economic policy of the Roosevelt Administration,
while Dalin’s paid more attention to the different capital factions competing for power. Esfir I. Gurvich was a
former companion to Bukharin from whom she owned a child. S. A. Dalin, Ekonomicheskaya politika ruzvelta,
Moscow: Ekonomicheskoe izd-vo, 1936; E. I. Gurvich, Poslevoennaya Amerika. Zagnivanie amrikanskogo
kapitalizma, Moscow: Gos. Ekonomicheskoe izd-vo, 1937.
14
Harvey Klehr, The Heyday of American Communism. The Depression Decade, New York: Basic Basic Books,
1984, p. 218.

3
Then, Varga did an about-face, arguing that the recession was ‘largely due to political
factors’ such as ‘the deliberate sabotage of the most reactionary sections of the United States
bourgeoisie’.15
Varga’s dilemma was clear when Roosevelt’s Planning Board expanded its scope to include
a variety of investigations into public works, natural resources conservation, 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 economic interest groups (industry, labor,
agriculture, and the professions).16 Though Varga remained critical to Roosevelt’s planning
activities, he was also impressed 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 associated with
Stalin’s foreign propaganda. Two publications, Two Systems - Socialist Economy and
Capitalist Economy17, and The U.S.S.R. and the Capitalist Countries,18 saw the daylight.
These publications deserve some attention as they were supposed to popularize the
achievements of the Soviet system and to promote socialism as an alternative to capitalism,
but this time without preaching the proletarian revolution. In 1938 Varga authored with
Stalin’s private secretary Lev Mekhlis19 and V. Karpinsky a propagandistic book The
U.S.S.R. and the Capitalist Countries hailing the Soviet Union as an economic great power.
Its main author was Varga, who took parts from his earlier writings or reports. In this poorly
edited pamphlet the three authors explain that under capitalism planning is possible and that
monopoly capitalists are responsible for low agricultural prices.20
In his own contribution, Varga argued that the crisis of 1929-33 and its ‘unprecedented
duration’ had to be explained ‘by the fact that this crisis occurred under the conditions of the
general crisis of capitalism.’21 Varga paid much attention to the new economic crisis of 1937.
This new crisis proved that the bourgeoisie could not hope for better times. He noticed that
the American capitalists were forced for the first time to sign collective agreements with the

15
Quoted in ibidem.
16
Patrick D. Reagan, Designing a New America. The Origins of New Deal Planning, 1890-1943, Amherst:
University of Massachusetts, 1999, p. 198.
17
In order to be accessible to a general public, they were largely stripped of Marxist concepts or congress
resolutions. Originally published as Kapitalizm i sotsializm za 20 let, Moscow: Partizdat, 1938. In French: Deux
systèmes. Économie socialiste et économie capitaliste, translated by Alix Guillain, Paris: Éditions sociales
internationales, 1938. In German: 20 Jahre Kapitalismus und Sozialismus, Moscow: Verlag für fremdsprachige
Literatur. In order to impress his foreign public, Varga had added to his name the qualification ‘formerly
professor of economics at the University of Budapest’. In English: Two Systems, London: Lawrence & Wishart
edition, New York: International Publishers (translation by R. Page Arnot from the German original), 1939.
Italian (in Rome) and Spanish (Buenos Aires) translation would follow after the Second World War.
18
L. Mekhlis, Y. Varga and V. Karpinsky (eds), The U.S.S.R. and the Capitalist Countries, Moscow: Foreign
Languages Publishing House, 1938.
19
At that moment Stalin’s longtime favorite, Colonel-General Lev Zakharovich Mekhlis (1889-1953), who had
been Stalin’s secretary, was editor of Pravda. In 1937 he had become head of the Main Political Administrative
Directorate (1937-1941). He was People’s Commissar of State Control (1941-1946); Political Commissar of the
6th Army; Minister of State Control and Deputy Chairman of Council of Ministers (1946-1950). Miklós Kun,
Stalin. An Unknown Portrait, Budapest and New York: Central European University Press, 2003, pp. 285-287.
20
Mekhlis, Varga, and Karpinsky, o. c., 1938, p. 8.
21
Ibidem, p. 9.

4
recently organized workers in heavy industries. According to Varga the average amount of
commodities per capita was lower than it was before the war and that at the same time an
enormous portion of the means of production are unutilized. Because the people had no
money to buy goods and wealth was being concentrated to an ever greater degree in the
hands of a few people, ‘capitalism has become a hindrance to the development of mankind. If
mankind is to advance, the rule of the bourgeoisie must be overthrown.’22
In a chapter on the hard lot of the peasantry in capitalist countries is revealed 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 middlemen, merchants and big capitalists were
standing between the peasant and the consumers and taking all the profit, ‘ruining the peasant
and robbing the urban consumer.’23 In his contribution, Varga focused on the situation of the
German peasantry as well. The Fascists, who were preparing for war, had ‘deprived peasants
of the right to sell their produce. Fascist officials taking all the grain, cattle, meat milk,
vegetables and eggs from the peasantry, left the latter with barely enough to feed their
families. Optimistically, Varga argued that the ‘toiling peasants of Germany carry on a fierce
and persistent struggle against the fascist regime which dooms them to poverty and
starvation’.24 He hailed the brave stand of the Spanish people against Fascism. He admitted
that ‘bourgeois democracy, half-hearted and scanty though it be in comparison with socialist
democracy, is at any rate better than fascist terror. That is why the proletariat marches at the
head of the united people’s front’.25

Two Systems

The central thesis in Varga’s particularly well-written Two Systems (its original 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 proletariat in the Soviet Union the productive forces were developing
at an incomparably quicker rate than in capitalism.26 In Varga’s synthesis the Soviet Union
had grown 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 system’.27 Hence, the rising tide of the
revolutionary movement could only be repressed by using fascist methods.
This textbook contains long Marx, Lenin and Stalin quotations, attacks on Trotskyists,
pedantic endnotes and statistical evidences underpinning Varga’s arguments about the
superiority of socialism over capitalism. Due to a slowing down of real accumulation

22
Ibidem, p. 10.
23
Ibidem, p. 25.
24
Ibidem, p. 31.
25
Ibidem, p. 41.
26
Varga’s textbook was praised by Mulford Q. Sibley (University of Illinois). ‘This is a good Communist
textbook; but as a treatment of comparative economic systems it would have been much more effective had
obvious over-statements been avoided and an endeavor made to raise the plane of argument above the level of
party polemic.’ American Political Science Review, 1940, Vol. 34, No. 2, p. 351. However, this ‘textbook’ was
nothing else than an updated and expanded version of his famous report to the Seventh Congress of the
Comintern.
27
Eugene Varga, Two Systems. Socialist Economy and Capitalist Economy, New York: International Publishers,
1939, p. 236.

5
enormous sums of money “saved” cannot be turned into productive capital.28 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.’29
According to Varga, Lenin’s fundamental conception was that imperialism is a
“superstructure” on capitalism, that there is no “pure imperialism”. Varga argued that Lenin
rejected as anti-Marxist ‘both the all-embracing “general cartel” of Hilferding, as well as the
Bukharinite idea of “organized capitalism”.’30 Obviously, Varga was well aware of the role
of military production since the outbreak of the economic crisis of 1929. Whole branches of
industry with military importance were depending on state subsidies. However, Varga
refrained from further investigating the effects of military spending. 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’,31 but due to the
introduction of machinery development 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 goods 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 cent since 1920; in the capitalist world by 2.7 per
cent.’32 More important, he also notes the complete independence of the development of the
economy of the Soviet Union from the cyclical movement of production of the capitalist
world’, as well the fact that criminal elements ’had made ‘desperate attempts to put obstacles
in the way of victorious socialist construction’.33 He argued that the possibility of the increase
of production in a socialist society extending over the world was ‘practically limitless’.34
Varga was not blind for the fact that inequalities in the development of separate branches of
industry was important and that production in ‘old industries’ was stagnating since the First
World War, while production in the new branches of industry had risen rapidly. 35 In line with
his earlier analysis of capitalism, Varga blames the bourgeoisie for being incapable of
utilizing the material productive forces it had created. That was no accidental phenomenon,
he argued, but followed of necessity from the inner development of capitalism. 36 In the
Soviet Union the utilization of the existing productive plants and the output of labor were
incomparably better than under capitalism, as here were never any market difficulties or
work stoppages. Thus, this proved the ‘tremendous superiority of the Soviet over
capitalism’.37 Varga hailed the rise and 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 workers was still below the average output of the workers in the technically most
advanced capitalist countries. But the output of the Stakhanovites was definitely higher in the
Soviet Union.38
Chronic mass unemployment under capitalism and the creation of an industrial reserve army
was a necessary product of accumulation and at the same time a condition of existence of the
28
Ibidem, p. 22.
29
Ibidem, p. 28.
30
Ibidem, p. 29. The association of Hilferding with Bukharin is particularly astute. However, it was Kautsky who
was the father of the “general cartel” and Hilferding’s was the idea of “organized capitalism”. In his The Great
Crisis, on p. 28, Varga also criticized Hilferding.
31
Ibidem, pp. 29-30.
32
Ibidem, p. 40.
33
These ‘criminals’ were the Trotskyites. Ibidem, p. 41.
34
Ibidem, p. 42
35
Ibidem, pp. 42-45.
36
Ibidem, pp. 46-70.
37
Ibidem, p. 57.
38
Ibidem, p. 70.

6
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’.39 According to
Varga this chronic mass army of the unemployed were superfluous ‘not only for the usual but
also for the greatest self-expansion of capital’.40 Therefore, an important part of the labor
force would remain permanently unemployed. Varga reintroduced his already previously
formulated ‘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.’ 41 But this time
he also admitted that the number of employed in the ‘unproductive’ occupations (trade,
banks, domestic services) had increased at the same time. 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 power of society.’ 42 In the period
of the general crisis of capitalism capital was not able anymore to guarantee its workers
existence, which was the best proof that the capitalist system would succumb in the fight
with socialism. ‘The period of the general crisis of capitalism is therefore the period of the
social revolution, as the victory of socialism on one-sixth of the globe clearly shows’43, he
concluded.
With the decay of free-market capitalism by imperialism the peaceful path of solution of the
market problem had been closed and accumulation problems had increased. Limited
consumer power of the proletariat also put limits to the sale of the means of production.44
However, Varga had to explain why the problem of the market 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
capitalist market in order to expand its market by transforming the peasantry into a rural
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 reductions and by keeping selling prices high.
Varga rejected the objection that the consumption power of society taken as a whole would
not shrink under monopoly capitalism: ‘The concentration of enormous sums of surplus
value by the monopolies, in the hands of the finance oligarchy, leads to a diminution of the
power of society to consume, because the finance oligarchy – in spite of the wild luxury they
go in for – can only use for private consumption a small portion of the enormous profits they
acquire’.45 In addition, the monopolies owned enormous masses of accumulated money for
which they could not find investment opportunities. Whereas in an early stage of capitalism
the problem 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. The chronic agrarian
crisis could be catalogued as a component of the general crisis of capitalism, because of the

39
Ibidem, p. 71.
40
Ibidem, p. 72.
41
Ibidem, p. 72.
42
Ibidem, pp. 72-73.
43
Ibidem, p. 83.
44
Varga argued that for this reason the theory of Tugan-Baranovsky, according to which the expansion of the
sale of the means of production is unlimited in capitalism was untenable. Ibidem, p. 89.
45
Ibidem, p. 93.

7
severe restriction of demand by the urban population. This chronic agrarian crisis could lead
to a reduction of agricultural productive forces, to a degradation of agriculture, thus ‘to the
mass ruin of the working peasantry in the capitalist world.’46 Varga noticed an increase of the
role of the state and propaganda for autarchy now that the market possibilities were
insufficient. The bourgeoisie tried to monopolize to the fullest extent possible the home
market by imposing bureaucratic controls on foreign trade transactions. 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 countries where cotton spinning was introduced.
State regulation of capitalist economy 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 advantage to
monopoly capital. ‘The aim of the New Deal consisted first and foremost in holding the
farmers and workers off from revolutionary mass action. (…) under the cover of social
demagogy, the New Deal gave the big bourgeoisie everything that they needed: billions from
the state treasure for the relief of bankrupt enterprises, not only getting rid of existing legal
obstacles to the formation of trusts, but positive advantages for the formation of monopoly by
forced trustification laid down in the codes, prohibition of the construction of new works,
minimum prices laid down by the state, etc.’47 The sudden increase in expenditures on
armaments coincided with the transition from depression to revival. However, Varga denied
that capitalism could ever eliminate crises by simply multiplying armament expenditures. If
armaments were financed by an equally large increase in taxes affecting the masses, then
there would be no extension of the market. A real expansion of the market could be obtained
by borrowing capital lying fallow. In addition, the agitation for a planned economy in
capitalism aimed at making the workers believe that a capitalist planned economy was
possible. But the indispensable 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
right- and left-wings of the Belgian Labour Party for a time, and diverting the dissatisfaction
of the workers into a reformist channel by the “fight for the Plan” (which he shamefully
betrayed when the longed-for opportunity presented itself of becoming a minister in a
bourgeois cabinet).’48 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’.49
According to Varga, the laws of capitalist reproduction led to a relative and absolute
impoverishment of the proletariat. Due to increased productivity the worker received an ever-
decreasing share of the values produced by him. Absolute impoverishment of the proletariat
occurred because capital strives to force wages below the value of labor power. However,
Varga indicated that the absolute impoverishment of the proletariat went with ‘interruptions,
in continual struggle between capital and proletariat’.50 In the period of the general crisis of
capitalism and chronic mass unemployment supply of labor power gave capital the
possibility 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 States and France the
political and legal conditions were more favorable than in other capitalist countries. In
addition, Varga attacked ‘bourgeois statistics’ being completely useless with regard to the
46
Ibidem, p. 102.
47
Ibidem, p. 135.
48
Ibidem, p. 140.
49
Ibidem, p. 140.
50
Ibidem, p. 143.

8
development of the position of the working class, for resolving the question whether and how
far an absolute impoverishment of the proletariat was taking place.51
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 peasantry, led to their ruin. He noticed that the
rich peasants had various possibilities 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’.52 Varga pointed to the fact that in Hungary, just as in
Italy, unemployment among agricultural workers was so tremendous that the government had
forbidden the use of harvesters.53 In the Soviet Union, an entirely new peasantry, such as had
not previously existed in the history of mankind, had emerged after collectivization: ‘a happy
peasantry, living in peace and joy, shedding its private economic peasant skin and merging
with the working class’.54
A chapter on the national and colonial question analyzed how the bourgeoisie of the
dominating nation oppressed national minorities in Europe. National oppression was
particularly heavily on the intellectuals, Varga added, because they had ‘to deny their
nationality or renounce any state post. The greater the unemployment among the
intellectuals, the more membership in the ruling nationality is used 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.’55 Hence, Varga concluded that national freedom and equal rights were
impossible in bourgeois society and that national oppression was hindering the cultural
development 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 last 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 Kuomintang wanted a
bourgeois anti-imperialist movement, and therefore it broke with the Comintern. Varga: ‘The
further development of the Chinese and particularly the Indian national movement for
emancipation clearly show the danger that a national movement led by the bourgeoisie loses
its striking force and makes compromises with the imperialist bourgeoisie at the expense of
the masses of working people.’56
Varga argued that the general crisis of capitalism had brought about a further worsening of
the living conditions of the colonial population, because the colonies 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 dropped considerably. Hence, he concluded that
imperialism had succeeded in easing the position of its industry at the expense of the
peasants in the colonies and that ‘the agrarian revolution’ was the ‘only way out of the
miserable condition of many hundreds of millions of colonial peasants’.57 Varga admitted
that in the colonies an alliance of the local landlords with the imperialists against the
peasantry was a fact and that the ‘big bourgeoisie’ had become ‘altogether reactionary’
51
Ibidem, p. 146.
52
Ibidem, p. 178.
53
Ibidem, p. 186.
54
Ibidem, p. 202.
55
Ibidem, p. 203.
56
Ibidem, p. 208.
57
Ibidem, p. 210.

9
supporting the conservative elements in the colonies in order to perpetuate pre-capitalist
forms of exploitation.58 But he also pointed to the nascent native bourgeoisie in the colonies
involved in certain branches of the consumption industry which was gradually bringing with
it the development of ‘native capital, of a native bourgeoisie.’59 New perspectives appeared
now that the native bourgeoisie tried to develop local industries. The further development of
native industries was, however, hampered by the narrowness of the local market and the
poverty of the colonial peasantry. Therefore, the native bourgeoisie had a direct interest in
changing the feudal agrarian constitution restricting the development of the domestic market.
But with the development of domestic industry, an industrial 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 Autonomous Republics existed. Varga argued,
that the ‘results of centuries of national oppression could not be set aside at one blow’. 60 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 Soviet Union were now all free from chauvinism, anti-Semitism and fascism.61
In his final chapter, Varga discussed bourgeois democracy. ‘Bourgeois democracy, in
comparison with all reactionary forms of domination of the exploiting classes, is an
achievement; it is an evil in comparison with the dictatorship of the working class, which –
as Lenin emphasized- is many times more democratic than the most progressive forms of
bourgeois democracy.’62 He warned for the illusion that 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 socialism. In the period of the general crisis of capitalism the
financial oligarchy wanted to abolish bourgeois democracy and to erect an openly violent
form of its dictatorship. Because of the unequal development in the different countries, some
countries were experiencing fascism, while elsewhere a struggle between fascism and
democracy was fought out, taking more and more ‘the character of a world battle between the
forces of fascist reaction and of progress.’63 Though in the United States and England the
bourgeoisie was defending in words democracy against fascism, the ‘undermining of
bourgeois democracy’ was already in play.64 Varga argued that in the victorious countries at
the outcome of the World War, the apparatus of force had remained more or less intact, but
that in the defeated countries 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 undoubtedly 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.’ 65 But he rejected its responsibility on the
opportunist leaders of Social Democracy and the trade unions having split the working class
while cooperating with the big bourgeoisie.
In this aseptic exposé Varga attacked several times Trotsky, Kautsky and Hilferding. But the
names of foreign politicians (Hitler!) were omitted and very little attention was paid to the
fascist economies. No calls for revolutionary uprisings were uttered. The “subjective factor”
was missing and the role of the Communist parties outside forgotten. Varga’s jerky and
58
Ibidem, pp. 210-211.
59
Ibidem, p. 211.
60
Ibidem, p. 216.
61
Ibidem, pp. 220-221.
62
Ibidem, p. 223.
63
Ibidem, pp. 225-226.
64
Ibidem, p. 226.
65
Ibidem, p. 227.

10
sloppy style had received a special treatment by a not further mentioned editor. When
criticizing notorious enemies of Socialism, Varga’s tone remained moderate, but the evils of
Fascism were criticized in particular harsh and sincere terms.66

Stalin’s analysis of the economic crisis

Internationally, the Soviet government had participated since 1934 in the struggle for
collective security promoted by the League of Nations, but this tactic had led to little success.
Alarming was Hitler’s annexation of Austria in March 1938, while in the west Social
Democratic parties became more and more inclined to neutralism or pacifism. In September
1938, Stalin discovered that ‘the unwritten maxim of Munich was to keep Russia out of
Europe’67 and to reorient Hitler’s expansion into eastern direction. On 15 th March 1939,
during the Eighteenth Party Congress, Hitler’s Wehrmacht marched into Czechoslovakia.
Just five days earlier, Stalin had announced in his ‘chestnut speech’68 what his attitude would
be in the next crisis. Stalin declared that ‘it looks very much as if this suspicious noise 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 for anyone else.’ The ‘suspicious
noise’ was a reference to Western accusations that Germany was aiming to create an
independent Ukrainian State.69 Stalin told his audience that a new imperialist war was already
in its second year, a war waged over a huge territory stretching from Shanghai to Gibraltar,
and involving over 500 million people.70
Stalin’s report contained a chapter on the international economic crisis that was largely
inspired by Varga’s writings. Stalin argued that the economic crisis broken out in the latter
half of 1929 had lasted until the end of 1933. After that the crisis passed into a depression,
and was then followed by a certain revival, 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 countries. The
capitalist countries thus found themselves faced with ‘a new economic crisis before they had
even recovered from the ravages of the recent one. (…) the present crisis is not universal, but
as yet involves chiefly the economically powerful 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 already reorganized their economies on a war footing, they,
because of the intense development of their war industry, are not yet experiencing a crisis of
over-production, although they are approaching it. This means that by the time the
66
‘In the fascist countries: suppression of the most elementary rights of the working people, a return to
barbarism, medieval persecution of the Jews; in Germany, persecution even of the Christian churches, a state-
supported resurrection of old German heathenism, and the burning of books. In the sphere of foreign policy: after
the short-lived democratic-pacifist period, the sharpening anew of the imperialist antagonisms, emergence of a
bloc of fascist aggressors, feverish arming, organization of capitalist economy in peace time for the coming war’.
Ibidem, p. 237.
67
Isaac Deutscher, Stalin. A Political Biography. London, New York and Toronto: Oxford University Press,
1949, p. 427.
68
Former US ambassador in Moscow and actual ambassador in Brussels Joseph E. Davis had coined Stalin’s
speech a ‘chestnut speech’. Ingeborg Fleishhauer, Der Pakt. Hitler, Stalin und die Initiative der deutschen
Diplomatie 1938-1939, Berlin and Francfort am Main: Ullstein, 1990, p. 114.
69
Gerald Reitlinger, The House Built on Sand. The Conflicts of German Policy in Russia 1939-45, London:
Weidenfeld and Nicolson, 1960, p. 40.
70
J. Stalin, ‘Report on the Work of the Central Committee to the Seventeenth Congress of the C.P.S.U.(B),’ in J.
Stalin, Problems of Leninism, Moscow: Foreign Languages Publishing House, 1947, p. 596.

11
economically powerful, non-aggressive countries begin to emerge from the phase of crisis
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 severe crisis.’71
Recalling that a serious economic crisis was developing, Stalin reproduced a table 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 begun in 1938.72 Germany, which
reorganized its economy on a war footing later than 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 giving industry ‘a one-sided, war direction; developing to the utmost the
production of goods necessary for war and not for consumption by the population; restricting
to the utmost the production and, especially, the sale of articles of general consumption --
and, consequently, reducing consumption by the population and confronting the country with
an economic crisis.’73
Stalin’s report to the Eighteenth Congress of the CPSU(B) drew an alarming picture of the
development of world-economic conditions.74 It was clear that a new economic crisis was
developing in the aftermath of a certain revival. Stalin concluded in his report that capitalism
possessed less more reserves to combat the effects of the crisis, which developed now much
more unevenly because of the switching 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 much worse than the previous one and it would be more protracted.
Stalin noticed that such an unfavorable turn of economic affairs could not but aggravate
relations among the powers. The preceding crisis had already mixed the cards and sharpened
the struggle for markets and sources of raw materials. The seizure 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 economic crisis was bound to lead to a further
sharpening of the imperialist struggle. 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 inadequate. It was now a question of a new re-division of the world, of spheres
of influence and colonies, by military action. Stalin identified three aggressive states: Japan,
Germany and Italy. ‘But war is inexorable’,75 Stalin exclaimed. It was a distinguishing
feature of the new imperialist war that it had ‘not yet become a universal, a world war.’ 76
Stalin saw an open re-division of the world and spheres of influence at the expense of the
non-aggressive states, without the least attempt 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, which possessed such vast opportunities, had so easily and without
resistance abandoned their positions in order to please their aggressors.
Stalin attributed the weakness of the non-aggressive states to the fear that a revolution 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 policy of collective security, the policy of
collective resistance to aggressors, and had taken up a position of non-intervention, a position
of “neutrality.” Stalin understood that the policy of non-intervention had revealed ‘an
71
J. Stalin, o. c., 1947, p. 598.
72
It seems that Varga had been the author of this part of Stalin’s report to the 18th Party. Congress. At any rate,
the impoverishment thesis was his.
73
J. Stalin, o. c., 1947, p. 599.
74
Fleishhauer, o. c., 1990, pp. 108-120.
75
J. Stalin, o. c., 1947, p. 601.
76
J. Stalin, o. c., 1947, p. 601.

12
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’.77 On the second day of the Eighteenth Party
Congress, Manuilski explained what had changed since the previous congress. Like Stalin,
Manuilski asserted that between 1929 and 1933 capitalism had lived a depression of a special
character with a sharpening of imperialist antagonisms that were announcing a new
imperialist war.78 According to him, the British bourgeoisie had delivered at Munich
Czechoslovakia to Fascism and he repeated that the English-French government was
diverting German Fascism into eastern direction.79
On 1 May Dimitrov’s speech had warned the British and French reactionaries for allowing
the fascist regimes to attack the Soviet Union.80 Then, Litvinov was replaced by Molotov at
Foreign Affairs. Molotov, who had no experience in international affairs, was not well fit for
that job.81 Some officials in the Comintern misinterpreted that appointment. Gyula Alpári still
believed in an international anti-fascist congress to be convened later that year. 82 On 11 May
1939, Izvestiya clearly explained that because of geographical circumstances the Soviet
Union would have to bear all the weight of an eventual war.
In those days, Comintern functionaries tried to interpret Stalin’s “chess nut” speech correctly.
Jürgen Kuczynski83 tried to analyze the character the new economic downturn in Great
Britain and France in relation with the falling purchasing power of the population84 and in
comparison with the situation in Germany (but also Italy and Japan) where the state had
reorganized the economy on a war basis by emitting special bills.85 Meanwhile, production of
consumer goods was kept down and inflation repressed. Kuczynski argued that a war
economy ‘before the outbreak of a large-scale war’ was liable to an overproduction crisis
‘just like any other form of capitalist economy.’ 86 He warned that the fascist state - because
of its terrorist nature - was also able ‘to delay the outbreak of a crisis even longer.’ 87 The
situation in a democratic capitalist state such as Great Britain was different. Here, the
overproduction crisis was already in full swing in spite of increased rearmament
expenditures. Armaments expenditure was met from loans reducing the purchasing power of
the population. He believed that a ‘people’s front government’88 could relieve the masses of
much effort directed to the production of armament goods.
The German-Soviet Non-Aggression Pact of 23 August 1939 (or Molotov-Ribbentrop
Agreement) sent a shock wave across the communist world movement. After the pact was

77
J. Stalin, o .c., 1947, p. 602.
78
Manuilsky in Rundschau über Politik, Wirtschaft und Arbeiterbewegung, Sondernummer, Basel, 13 March
1939, Vol. 8, No. 12, p. 357.
79
Ibidem, p. 361.
80
D. Dimitroff, ‘Das Land des Sozialismus und der Kampf des internationalen Proletariats’, in Rundschau über
Politik, Wirtschaft und Arbeiterbewegung, 1939, Vol. 6, No. 27 (4 May), pp. 701-705.
81
Walter Bedell Smith, who had got acquainted with the Molotov’s in Moscow in 1946-1949, described Molotov
as a cold, humorless man becoming a stutter when being nervous. Molotov’s wife had visited the United States
in 1936, where she had been received at the White House. Her brother, Sam Karp, was a businessman living in
Connecticut. Molotov arrived for the first time in his life in 1943 in the US.
82
Rundschau über Politik, Wirtschaft und Arbeiterbewegung, 1939, Vol. 6, No. 29 (11 May), pp. 781-785.
83
His pseudonym was John Knight.
84
John Knight, ‘Economic crisis and armaments’, in Labour Monthly, 1939, Vol. 21, No. 5, pp. 290-296.
85
Ibidem, p 292.
86
Ibidem, p. 292.
87
Ibidem, p. 293.
88
Ibidem, p. 296.

13
made public, the communist parties ‘promptly’89 expressed their solidarity with 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 stay on their antifascist positions in the future. 90
The outbreak of the Second World War a week after the inking of the treaty would change
the political and military situation in Europe fundamentally. Meanwhile, Varga paid attention
in his publications to British politics91 and he even ordered a Russian translation of Hermann
Rauschning’s book Hitler Speaks92 in order to elucidate what Hitler’s real intentions.93

Conclusions

In the aftermath of the Seventh Congress of the Comintern Varga concentrated his
propagandistic work on defending Stalin’s industrialization and collectivization offensive and
his foreign policy, including the Popular Front strategy of the Comintern. Meanwhile, Varga
believed in the fatal decay of capitalism now that the general crisis of capitalism had brought
a further worsening of the living conditions of the working class, the peasantry and the toiling
masses in the colonies. Reactionary forms of capitalist domination had succeeded bourgeois
democracy in many countries, while even in the United States and Great Brittain the
bourgeoisie 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 analysis of the
international world economy, which proved that Varga’s position had been considerably
reinforced after the Great Purges during the previous years.

89
Dimitar Sirkov, ‘On the policy of the Communist International on the eve and at the beginning of World War
II’, in Jahrbuch für Historische Kommunismusforschung, 1995, p. 55.
90
Sirkov, o. c., 1995, p. 57.
91
Varga published a review of Winston Churchill’s book Step by Step in Mirovoye Khozyastvo i Mivovaya
Politika, 1939, No. 9, pp. 249-250.
92
Hermann Rauschnig, Gespräche mit Hitler, Zürich-New York: Europa Verlag, 1940. English translation:
Hitler Speaks, London: Thorton Butterworth, 1939. In America, Hitler Speaks was given a different title: The
Voice of Destruction, New York: G. P. Putnam's Sons, 1940.
93
‘I knew the book of Rauschnig (sic) and let it Varga recommend to the Politburo. It was for that use hastily
translated; our employees dictated continuously sixteen hours long.’ Béla Fogarasi, Parallele und Divergenz
(Ausgewähkte Schriften), Budapest: MTA Filozófia Intézet (Archívumi Füzetek VIII.), 1988, p. 227.

14