The Great Depression - Fact v Fiction

As some of my readers may have seen, I recently wrote an article for the Independent in which I discussed the lessons learned from the Great Depression and the Wall Street Crash. In the piece I argued that whilst history often paints the US’ recovery as a picture of Keynesian success, the truth is that many of the measures implemented, including Roosevelt’s much lauded New Deal failed to stimulate the economy. In tackling the current economic crisis, we have to learn from history if we are not to repeat its mistakes, but we will learn nothing if the experiences of history are heavily edited to suit political agendas and prejudices. Too often I hear the so-called Keynsians and others of the “borrow and spend” persuasion saying that all the lack of economic recovery despite the massive stimulus of deficit spending, zero interest rates and QE demonstrates is that we need to do more of the same.  There is of course another possibility , as the economic history of the Great Depression suggests.
 
The full article is included below.

The Great Depression - Fact v Fiction
 
The philosopher George Santayana said, "Those who do not remember the past are condemned to repeat it."
 
We are in the sixth year of the financial crisis which started in 2007 and experiencing problems which are reminiscent of the Great Depression with faltering economic growth, high unemployment, deflation, and a badly damaged and still shaky banking system. It’s therefore unsurprising that commentators and policy makers would look to that period for lessons on what to do and what to avoid. However, what we need in order to learn from the Great Depression, is a firm grasp of what happened then.  Most commentary I hear or read is along the lines of: The Great Depression was triggered by the Wall Street Crash, itself the result of laissez faire capitalism. The Depression was deepened as a result of the failure of governments to adopt what would come to be called Keynesian techniques to stimulate demand and by adherence to the Gold Standard. It was only when Franklin D. Roosevelt took office and implemented the New Deal that America began to recover from the Depression as these Keynesian methods stimulated demand.
 
Sadly this version of events owes more to myth than reality. Firstly, the idea that laissez faire free market policies were the root cause of the Crash and subsequent Depression is far removed from reality. In fact Herbert Hoover who preceded Roosevelt as President until 1932 was criticised by FDR for ‘reckless and extravagant spending’ and ‘thinking we ought to control everything in Washington’, and he introduced the Smoot-Hawley Tariff in 1930 which stopped many imports. The dramatic contraction of the money supply by the Fed which began in 1929 and the rise in interest rates from 1928 helped to cause and then exacerbate the impact of the Crash. This was not simply a failure of capitalism or free markets. It had a lot of help from the government. The Hoover administration was interventionist, not laissez faire, and its interventions caused problems and made matters worse.
 
But surely all this changed after FDR said, ‘We have nothing to fear but fear itself’ (which was not original-it was a phrase borrowed from 19th century writer Henry Thoreau)?  Roosevelt announced spending of $10 billion when government revenues were $3 billion p.a., and government spending rose by 83% between 1933 and 1936 whilst Federal debt rose by 73%.
 
Simultaneously many measures were implemented which were a drag on economic activity. The Social Security Act which introduced a minimum wage kept many unskilled workers out of the labour market. The Agricultural Adjustment Act produced the destruction of crops and cattle. The National Recovery Administration or NRA created a massive bureaucracy which increased the cost of doing business significantly: shortening hours and raising wages. Night work was banned. 500 NRA codes were introduced governing production of articles ranging from lingerie to lightning rods. So-called “cut throat” pricing was banned - a tailor was sent to jail for pressing a suit for 35 cents instead of the NRA mandated 40 cents.  How these anti-competitive and bureaucratic measures were supposed to promote activity is a mystery. The net result was that industrial production dropped by 25% in the six months after the NRA came into effect.
 
Simultaneously, Roosevelt’s Civil Works Administration (CWA) engaged in employment of masses in some perfectly pointless activities such as researching the history of the safety pin and using balloons to frighten birds away from public buildings. When the CWA became the Works Progress Administration similar nonsense continued such as cataloguing ways of cooking spinach. In a foretaste of our times WPA workers were also used to collect Democratic Party campaign contributions. So was born the idea of a “client” class dependent on the state who would automatically vote for the party giving the handouts. The parallel with today’s loyal Labour following in the public sector, the North of England, Scotland and Wales is obvious.
 
Far from ending the Great Depression, such measures served to prolong it-preventing the workforce from seeking real jobs and diverting resources to politically motivated projects.
 
They were accompanied by a series of anti business and “soak the rich” tax provisions. The top marginal rate of income tax was raise first to 79% then to 90%, personal tax exemption was lowered to just $600 p.a., estate tax went up to 70% and gift tax to 52.5%. Corporate taxes were also raised with surtaxes for undistributed profits.
 
Unsurprisingly the economy slumped back into Depression in 1938 and the stock market halved again from 1937-38, which can hardly have been the result of laissez faire capitalism. FDR acolytes claim this was due to the Supreme Court outlawing the NRA and premature attempts to cut spending and balance the budget. But it is estimated that the reduction which resulted from this was only about 1% of GDP which was far too small to cause the problem-just as austerity cannot now be the cause of the UK’s problems because there hasn’t been any yet. Government spending has continued to rise inexorably since the coalition took office.
 
By the time war broke out in 1941, unemployment was still 17%. Hardly a triumph for two presidential terms of Keynesian policies.
 
So what did pull America out the Depression? The Second World War? America’s involvement in the War was unique. It did not join the War until two years after it started allowing America to benefit from the rearmament of the Allies as the ‘arsenal of democracy’ to quote FDR. Even when it entered the War, it suffered none of the destruction of assets and infrastructure which the other Allies did other than the attack on Pearl Harbour and so had all the benefits in terms of demand from rearmament and none of the disruption suffered by other combatants.
 
The War was then followed by the Truman administration which was far less anti-business than FDR’s had been. This combination of factors was the cause of recovery.
 
We have to learn from history if we are not to repeat its mistakes, but we will learn nothing if the experiences of history are heavily edited to suit political agendas and prejudices. We need to be told the truth.

Comments

[Bill Wiggins]

WE need to be told the truth.......which is?

...apologies if this sounds naive...but your article kind of left me hanging in mid-air

ps...you are one of the few ppl who talks any kind of sense.

[JDF]

Worth comparing with the UK experience at the same time, when successive governments that maintained a relatively limited role in the economy helped ensure that economic recovery came much earlier to the UK than to the US or many other economies (the high levels of unemployment in areas that were dominated by the shipbuilding industry (which was hit by both the collapse in trade and in investment) were not typical - the overall UK unemployment rate was much less problematic than in other countries).

Worth noting that - while global economic trade was badly hit by protectionist measures - this effect was dwarfed by the fall in cross-border investments that resulted from capital controls abd collapsing confidence that governments would allow investors to keep the beenfiots of their investments.

[Terry Smith]

Bill Wiggins: The truth is that the politicians, commentators and economists who think we can borrow and spend our way out of the current crisis are delusional, and the historical parallels they give to events like the Great Depression to justify this are false.

[Nick B.]

The root of the problem is vote buying using the voters money. Trouble is it seems to be possible to fool a sufficient number of voters that government intervention is in their best interests. Thus we are heading straight for the cliff and a painful end to tax, borrow and spend. The 5.00 pm news now tells me that GDP grew by 1% in the last quarter largely due to money spent on the Olympics. That's the economy fixed then!

WWII clearly did more for the US economy than it did for Europe's, but the real boom came after the war when returning US servicemen got stuck into the better life with new homes, cars and household appliances all made in the US.

It's taken a long time for the decision to export manufacture in favour of high finance and dodgy debt to wield its axe - but here we are.

[Richard]

I agree. So what should they do?

[John pd]

"The dramatic contraction of the money supply by the Fed which began in 1929, & the rise in interest rates from 1928 helped to cause & then exacerbate the impact of the crash. This was not simply a failure of capitalism or free
markets.It had a lot of help from the govt."

Terry, are you saying that the Fed is part of the US govt?
I thought it was a for-profit private consortium of banks?

Regards
JD.

[RussH]

As its been pointed out the real boom came after the war. Where did all the money come from to finance that?.

Or was it case of "mass investing in things that produced a return"?. Since all money is made up these days I am not convinced that whether we make up more pretend money or say there is less pretend money, will make any difference. I can see that if the pretend money we have is used to make a real person do something that produces a return, the economy can recover.

The situation now is complicated by the fact that most of the things we need, do not need need people to produce them, its cheaper to use robots than people in China and automated weeding machines and driver less cars are appearing, so how will there be a jobs recovery?

Whereas before if something was manufactured , someone had to produce it and they got paid a wage which was recycled in the economy. Now someone borrows money from a Bank to buy a robot and the Bank gets the money to pay back the loan for the robot and promptly sends it offshore, so how do we recycle the wealth and grow the economy?.

[David Lilley]

This is good history and it is "objective knowledge" (correspondence with the facts). It was WW2 and not Highway 66 and the Boulder Dam that returned the US to growth. A captive audience of arnaments buyers was the multipier.

The Keynesien multipier: create 100 new jobs and get an extra 80 ancillary jobs for free was always rubbish. The proof is that if it were true we would always have 100% employment.

However, there was logic in government stimulus spending when individuals and companies were disinclined to spend.

All the "fairy dust" folk call for Keynesien spending when it is a rainy day. How about when its not raining?

The answer is that GB did just that in the 1997/2007 decade. Do you remember that government spending was called "investment" and off-balance sheet PFI grew to £316b. but the result was massive debt, low public sector productivity and 36% of the male working age population not in work.

[Ian Lauriston]

Terry, I am interested in the historical perspective here and would like to explore it further in the hope of getting a far better understanding. Is there a definitive text that assesses the period from this viewpoint - or even better provides an analysis/comparison with the more widely held and perhaps conventional view? Thank you.

[Propylene Glycol]

Its been six years of financial crisis that hit the world, such a large period and bad phase for every1. What are they doing to overcome this problem.

[John pd]

Our present crisis is similar to the 1930s Depression in that it is FED caused.
As Terry remarked in his article the FED caused the contraction of the money supply.
Alan Greenspan of the FED held interest rates low, & approved the 'diced & spliced' sub-prime mortgage fiasco which has led directly to the loss of confidence within banks & the present day contraction of the money supply.

Why?

Check out UN Agenda 21. It is a UN blueprint for the 21st century. It's goals are a vast contraction in world population, the abolition of private property, & the abolition of the family.
'The New American' 10 july 2012 will enlighten.

Part of the plan of the UN & it's backers is an equalising of wealth between Countries & Continents involving the impoverishment of the First World, & the enrichment to parity of the Third World.
This is what we are seeing now.

We live in interesting times.
:)
JD.