How not to learn from the Great Depression

[mendeleev 68]

I challenge you to cite a mainstream economic analysis written more than a decade ago which supports your claim.

from Charles McMillion's The 'FDR Failed' Myth:

http://www.ourfuture...fdr-failed-myth

Bio on the author:

Dr. Charles W. McMillion is president and chief economist of MBG Information Services, a business information, analysis and forecasting firm based in Washington, DC. He is a former contributing editor of the Harvard Business Review and a former associate director and professor of the Johns Hopkins University policy institute. He is a founder of the bi-partisan US Congressional Competitiveness Caucus and was its first policy director.

Interesting paste/post. It would be great if showing people historical facts to counter historical fiction would encourage support for sounder policy. It appears that our biggest competitor (China) learned lessons from our history better than we have -- they responded to the crisis with a stimulus much larger, relative to the size of their economy, than we did. And they are getting far better results.

Edited July 1, 2010 by novotul

[JohnSmith2007 353]

I challenge you to cite a mainstream economic analysis written more than a decade ago which supports your claim.

How FDR Made the Depression Worse

February 1, 1995

Robert Higgs

Franklin Roosevelt “did bring us out of the Depression,” Newt Gingrich told a group of Republicans after the recent election, and that makes FDR “the greatest figure of the 20th century.” As political rhetoric, the statement is likely to come from someone who does not support a market economy. The New Deal, after all, was the largest peacetime expansion of federal government power in this century. Moreover, Gingrich’s view that FDR saved us from the Depression is indefensible; Roosevelt’s policies prolonged and deepened it.

There’s no doubt that Roosevelt changed the character of the American government—for the worse. Many of the reforms of the 1930s remain embedded in policy today: acreage allotments, price supports and marketing controls in agriculture, extensive regulation of private securities, federal intrusion into union-management relations, government lending and insurance activities, the minimum wage, national unemployment insurance, Social Security and welfare payments, production and sale of electrical power by the federal government, fiat money—the list goes on.

Roosevelt’s revolution began with his inaugural address, which left no doubt about his intentions to seize the moment and harness it to his purposes. Best remembered for its patently false line that “the only thing we have to fear is fear itself,” it also called for extraordinary emergency governmental powers.

The day after FDR took the oath of office, he issued a proclamation calling Congress into a special session. Before it met, he proclaimed a national banking holiday—an action he had refused to endorse when Hoover suggested it three days earlier.

Invoking the Trading with the Enemy Act of 1917, Roosevelt declared that “all banking transactions shall be suspended.” Banks were permitted to reopen only after case-by-case inspection and approval by the government, a procedure that dragged on for months. This action heightened the public’s sense of crisis and allowed him to ignore traditional restraints on the power of the central government.

In their understanding of the Depression, Roosevelt and his economic advisors had cause and effect reversed. They did not recognize that prices had fallen because of the Depression. They believed that the Depression prevailed because prices had fallen. The obvious remedy, then, was to raise prices, which they decided to do by creating artificial shortages. Hence arose a collection of crackpot policies designed to cure the Depression by cutting back on production. The scheme was so patently self-defeating that it’s hard to believe anyone seriously believed it would work.

The goofiest application of the theory had to do with the price of gold. Starting with the bank holiday and proceeding through a massive gold-buying program, Roosevelt abandoned the gold standard, the bedrock restraint on inflation and government growth. He nationalized the monetary gold stock, forbade the private ownership of gold (except for jewelry, scientific or industrial uses, and foreign payments), and nullified all contractual promises—whether public or private, past or future—to pay in gold.

Besides being theft, gold confiscation didn’t work. The price of gold was increased from $20.67 to $35.00 per ounce, a 69 percent increase, but the domestic price level increased only seven percent between 1933 and 1934, and over the rest of the decade it hardly increased at all. FDR’s devaluation provoked retaliation by other countries, further strangling international trade and throwing the world’s economies further into depression.

Having hobbled the banking system and destroyed the gold standard, he turned next to agriculture. Working with the politically influential Farm Bureau and the Bernard Baruch gang, Roosevelt pushed through the Agricultural Adjustment Act of 1933. It provided for acreage and production controls, restrictive marketing agreements, and regulatory licensing of processors and dealers “to eliminate unfair practices and charges.” It authorized new lending, taxed processors of agricultural commodities, and rewarded farmers who cut back production.

The objective was to raise farm commodity prices until they reached a much higher “parity” level. The millions who could hardly feed and clothe their families can be forgiven for questioning the nobility of a program designed to make food and fiber more expensive. Though this was called an “emergency” measure, no president since has seen fit to declare the emergency over.

Industry was virtually nationalized under Roosevelt’s National Industrial Recovery Act of 1933. Like most New Deal legislation, this resulted from a compromise of special interests: businessmen seeking higher prices and barriers to competition, labor unionists seeking governmental sponsorship and protection, social workers wanting to control working conditions and forbid child labor, and the proponents of massive spending on public works.

The legislation allowed the President to license businesses or control imports to achieve the vaguely identified objectives of the act. Every industry had to have a code of fair competition. The codes contained provisions setting minimum wages, maximum hours, and “decent” working conditions. The policy rested on the dubious notion that what the country needed most was cartelized business, higher prices, less work, and steep labor costs.

To administer the act, Roosevelt established the National Recovery Administration and named General Hugh Johnson, a crony of Baruch’s and a former draft administrator, as head. Johnson adopted the famous Blue Eagle emblem and forced businesses to display it and abide by NRA codes. There were parades, billboards, posters, buttons, and radio ads, all designed to silence those who questioned the policy. Not since the First World War had there been anything like the outpouring of hoopla and coercion. Cutting prices became “chiseling” and the equivalent of treason. The policy was enforced by a vast system of agents and informers.

Eventually the NRA approved 557 basic and 189 supplementary codes, covering about 95 percent of all industrial employees. Big businessmen dominated the writing and implementing of the documents. They generally aimed to suppress competition. Figuring prominently in this effort were minimum prices, open price schedules, standardization of products and services, and advance notice of intent to change prices. Having gained the government’s commitment to stifling competition, the tycoons looked forward to profitable repose.

But the initial enthusiasm evaporated when the NRA did not deliver, and for obvious reasons. Even its corporate boosters began to object to the regimentation it required. By the time the Supreme Court invalidated the whole undertaking in early 1935, most of its former supporters had lost their taste for it.

Striking down the NRA, Chief Justice Charles Evans Hughes wrote that “extraordinary conditions do not create or enlarge constitutional power.” Congress “cannot delegate legislative power to the President to exercise an unfettered discretion to make whatever laws he thinks may be needed.”

Despite the decision, the NRA-approach did not disappear completely. Its economic logic reappeared in the National Labor Relations Act of 1935, reinstating union privileges, and the Fair Labor Standards Act of 1938, stipulating regulations for wages and working hours. The Bituminous Coal Act of 1937 reinstated an NRA-type code for the coal industry, including price-fixing. The Works Progress Administration made the government the employer of last resort. Using the Connally Act of 1935, Roosevelt cartelized the oil industry. Eventually, of course, the Supreme Court came around to Roosevelt’s way of thinking.

Yet after all this, the grand promise of an end to the suffering was never fulfilled. As the state sector drained the private sector, controlling it in alarming detail, the economy continued to wallow in depression. The combined impact of Herbert Hoover’s and Roosevelt’s interventions meant that the market was never allowed to correct itself. Far from having gotten us out of the Depression, FDR prolonged and deepened it, and brought unnecessary suffering to millions.

Even more tragic is the lasting legacy of Roosevelt. The commitment of both masses and elites to individualism, free markets, and limited government suffered a blow in the 1930s from which it has yet to recover fully. The theory of the mixed economy is still the dominant ideology backing government policy. In place of old beliefs about liberty, we have greater toleration of, and even positive demand for, collectivist schemes that promise social security, protection from the rigors of market competition, and something for nothing.

“You can never study Franklin Delano Roosevelt too much,” Gingrich says. But if we study FDR with admiration, the lesson we take away is this: government is an immensely useful means for achieving one’s private aspirations, and resorting to this reservoir of potentially appropriable benefits is perfectly legitimate. One thing we have to fear is politicians who believe this.

--------------------------------------------------------------------------------

Robert Higgs

Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

http://www.independent.org/newsroom/article.asp?id=111

[one...two...tree 2,762]

A libertarian anarchist isn't mainstream. He may be an economist, but the above piece reads more like an opinion piece than a real analysis of FDR's economic policies.

[luckytxn 2,264]

I challenge you to cite a mainstream economic analysis written more than a decade ago which supports your claim.

from Charles McMillion's The 'FDR Failed' Myth:

http://www.ourfuture...fdr-failed-myth

Bio on the author:

Dr. Charles W. McMillion is president and chief economist of MBG Information Services, a business information, analysis and forecasting firm based in Washington, DC. He is a former contributing editor of the Harvard Business Review and a former associate director and professor of the Johns Hopkins University policy institute. He is a founder of the bi-partisan US Congressional Competitiveness Caucus and was its first policy director.

We will star off with this and I will post a couple more and go work and post more later. Or anyone else can just google. When I took economics in college it was taught that FDR hurt the economy a lot by trying to spend us out of the depression. It deepened and lasted long enough that only a world war got us out of. This article will help explain why.

They Done Us Wrong: Spending Our Way Into Greater Depression

by Michael S. Rozeff

by Michael S. Rozeff

If you like economic depression, Obama is your man. The stock market is shouting this message loudly and clearly. The S & P 500 (measured by the security SPY) made a little high at 100.41 on November 4, 2008. The election was the next day. It has been downhill ever since. The close on March 2, 2009 was 70.60. This 30 percent decline qualifies as what used to be an ordinary bear market!

Congress and the President could not construct better measures, proposed and enacted, to deepen this depression if they tried. Congressional Democrats intend to ensconce Democrats as the majority party for the next 25 years or so. Their chosen method is wasteful pork sold as rational investment. But by gilding the nests of their chosen constituencies and supporters with huge taxpayer-funded giveaways, they will deepen and lengthen the depression.

The stock market tells us this, but it is easy for stimulus supporters to explain away the stock market’s drop in other ways. Obama supporters are likely to extol the good things that his program is doing to revive spending in the economy, and to regard the stock market as an aberrant den of gamblers and thieves who deserve their Bush-induced fate.

Very few men on the street, including my doctor, understand that spending, whether private or government, does not get rid of economic depression; and the lack of spending does not cause it. They do not fathom that government spending, borrowing, and taxing will further gash the sinking economy below the water line and send it to its watery grave. They are more inclined to believe, along with prominent economists, that government spending should be increased by trillions more. There cannot be too much of a good thing.

People automatically think that if everyone does not spend, then how can businesses keep going and hire people? How can the economy work? Then they think, if people only have money, then they can spend. If the government spending will only put that money into their hands, this will cause people to spend. It will jump start the economy, restore business confidence, and all will be well.

This story has a firm hold on the public imagination, but things don’t work that way. People in the aggregate can only earn money to spend by working productively. Money still doesn’t grow on trees.

The government doesn’t have a money tree either. Without resorting to inflation, it can only shift money around. America’s federal government is a group of Americans who are empowered to tax the rest of us and borrow from anyone in the world. This money is collected from you, me, and others. We then have less to spend. Shifting money from the left pocket to the right pocket doesn’t enhance the total amount.

Americans are not unwise enough to accept government money that is rolled off a printing press with absolutely nothing to back it up. Our government does not do things so crudely. Its money is printed up for it only after it issues government bonds that promise to pay interest. For all practical purposes, these bonds are perpetuities on which the promise is made to pay interest forever. There is no government money tree in this process because the government taxes Americans to pay the interest. If the government borrows from us and spends more now, we have less to spend now. The money goes from one pocket to another with no aggregate gain.

The government has another way to borrow. The central bank (the FED) can take the bonds and credit the government’s bank account. This exchanges one credit for another credit. The taxpayer must still pay interest. The credit created for the government has not directly diminished the taxpayer’s wealth on his personal account. There has been no money transferred from taxpayer to government. The taxpayers have a new liability, nonetheless. They will be made to pay the present value of the interest payments, which is the value of the bonds. This may or may not crimp their spending. It probably will not. They are unlikely at first to realize that they owe this money. As time goes on and they have to pay higher taxes, they might realize it. When the government relieves many people of direct taxes, it hides this burden of the debt for as long as it can.

So what do we have? The government can get money from the FED and spend it. It will seem to many people like money that grows on trees because they do not see the eventual taxes or the current hidden taxes. The government can spend this money. It will stimulate people into working at various government-selected projects. There is, however, no such thing as a free lunch. If people do not value these projects (which is usually the case) or the projects lose money (which they usually do), the welfare of people does not go up. It goes down, for they are paying for useless work. Furthermore, the government spending raises costs and prices by bidding labor and materials away from others. And this prevents those prices from adjusting to levels that make it profitable for businesses to employ people in making stuff that people really want.

There are those who contest the notion that government spending is largely waste. They imagine brand new bridges, newly-paved roads, and intercity rail transport. Even if these projects paid off, they are a tiny fraction of all government spending. And most of these do not pay off. Government spending only creates wealth if it spends money on things whose return exceeds the cost of the capital used. The government’s own operating costs are so high that, viewed as a business, it gets a return on its investments that falls far short of its capital costs. In other words, the government is like a gigantic money-losing business. One reason for this is that interest groups get the money. The image of public-minded officials dispersing the money efficiently is unreal.

Everyone who has spent any time at all looking into the matter of government spending, all regular readers of LRC, all readers of Ideas in Liberty, all readers of the publications of the Independent Institute, etc., and all those who have not looked into it, but have merely had experience with government, take it for granted that every $1 spent by government costs the taxpayer $1.25 or more. Governments routinely destroy wealth. The case is so overwhelming that anyone who believes otherwise can only be willfully ignorant or blinding himself. One scholar (Martin J. Bailey), who was far from a radical anti-government person, but who spent many years studying government and trying to write an improved Constitution to mitigate problems with representative government, wrote as follows:

"The leader, if truly well-informed, will know about several barriers to sound government. We may summarize these as follows. In existing nations the clash of interests often has powerfully wasteful and detrimental effects, among other reasons because elected professional politicians with almost unlimited authority to enact and administer laws are subject to enormous rent-seeking pressures. Indeed, they seek out groups that have been unable to solve their own organizational free rider problems and solve them through legislation – e.g., for labor in the 1930s through the National Labor Relations Act and more recently for the poor and the ‘homeless.’ Political discourse in all venues is routinely filled with fraudulent claims, slander and other misrepresentations. Even if they might wish to enact perfectly constructive, statesmanlike legislation, politicians have no reliable conduit with which to collect valid information about the preferences and values of their constituents. A fundamental reason for these symptoms is that citizens have no incentive to seek out the truth on public issues, but instead choose rational ignorance and, often, rational non-participation. See Downs (1957: 238–274). From this core problem emanate others that permeate government. Finding a corrective mechanism for this core problem is a necessary condition for overall improvement."

It helps the cause of liberty when polite and well-mannered experts, people who have studied the matter for years and speak in restrained tones, inform us that politicians cater to interest groups and not the public welfare, that they routinely lie, that they organize interest groups and shake them down, that even if they wanted to, they could not serve the public interest, and that our representative government is wildly dysfunctional.

The image of government restoring confidence by raising and spending money could not be more mistaken. This is the fantasy of Keynes. It is the rhetoric of FDR ("the only thing we have to fear is fear itself"). If business confidence depended on government spending, there would not have occurred any of the last 5 recessions in the U.S., for government spending rose both before and during these recessions. And there would have been a recession during the Clinton years when government spending moderated. The confidence of a businessman depends on the anticipated demand for his goods and services. He does not invest in plant and hire labor on the basis that the government is spending money on its favorite interest groups.

There are unemployed resources in a depression. Doesn’t the government improve matters by putting these to work? There is a large vacant building for lease in a nearby commercial strip. It used to be a shoe store. At the same time, there are unemployed men and women in the area. So far, no business has seen fit to rent the building. Does the government have a viable business in view? This is highly doubtful. It is not how the government operates. If it directly hires the building, the chances are that it will hire people to do make-work. The operation will run a loss, paid for by taxpayers. Why should they be taxed to pay the unemployed and lose money in the process? Nothing is accomplished but a transfer of wealth from taxpayers to the unemployed and an additional loss. Meanwhile, when business recovers and seeks to satisfy needs of consumers, it finds that its costs are higher because the government has rented the building and hired labor. The government’s actions inhibit recovery. Why should wealth be taken from taxpayers? If they would have spent the money on goods, they no longer can. If they would have invested it, that too is no longer possible.

Meanwhile, there is another effect of government borrowing from the FED. When the FED credits the government, it creates bank reserves. This typically sets off a multiple credit expansion among banks. This stimulates business, but it is a process of credit inflation that leads to a recession or worse. Ordinarily, business demand for labor and materials is constrained and rationed by the supply of savings. The FED’s credit creation, however, causes a lowering of the interest rate. That relaxes the constraint. The stimulation causes economic distortions and imbalances and eventual recession.

Imagine that IBM is induced to borrow and to produce a new supercomputer because it thinks that its cost of capital is lower. It hires people, builds a new production line, and starts churning out new supercomputers. Other businesses do the same. But their planned selling prices and costs are predicated on spending, saving, and hiring patterns that no longer exist – the credit inflation changes all of that. The business activity that comes into the economy affects particular people first and not others, and their spending and saving behavior is not what would have occurred had they not been employed and paid in this new activity. Furthermore, people change their economic behavior when they observe the activities of others and experience price changes.

The result is that somewhere along the way, some businesses find that their costs are rising beyond what they planned and expected. Some businesses also find that people are not buying the newly-produced items in the anticipated volume. The costs are rising because IBM is competing with Apple and many others to hire factors of production. Some products are not selling because the stimulus is uneven or not neutral in its effects. To sell their products, some firms have to lower their prices. Since they still have to pay their debts, they find themselves caught in a squeeze. This leads to cutbacks. This affects other firms. A recession or depression starts.

Government credit inflation is not a free lunch. The Obamaniacs are not overtly promising more depression via increased government spending, but that is inherent in their program. If they borrow from the public, it has no net stimulating effect. If they borrow from the FED, it produces temporary stimulation and inflation and then further depression. Credit creation through the central bank ultimately sends the economy on a downward course.

The stimulus story is that if people only can get money, they can spend and the economy will rise. People only can earn money by working. They earn money by providing something of value to others, like their labor or a good or service. The money they get entitles them to cash in on the value of their service by choosing to buy the goods or assets that others make available.

The image of money making the wheels of commerce turn is misleading. The money is a counter, a ticket that allows one to buy an array of goods. Money is a chit or a voucher. Money is a credit that can be cashed in against society’s goods and services; it is a credit that you can use up as you choose. When you make money, that money measures something else that is more basic, which is that you have supplied a valuable service or good. The money is an option to get goods in return at a later time and place of your choosing.

Money is not the problem. We do not have a depression for lack of money. The official M1 money supply at this time is almost $1.6 trillion. It was $1.4 trillion when the depression began. The problem is much more subtle. It has to do with prices and the price system. It has to do with overcoming problems caused by bad credits that arose when the price system was distorted by inflation. We have a depression because of the distortions and imbalances in the economy that arose over many years when too many people were induced by the FED to borrow too many credits and use them to buy and produce goods and services.

The image of government spending putting money into people’s hands is misleading. When the federal government spends money on windmills, it has to get that money from taxes or borrowing. When it borrows from the public, it has to raise taxes to pay the costs of the debt. So we may as well say that all the federal spending is paid for with taxes. This takes money out of the hands of those who might otherwise spend it or invest it. The government isn’t jump-starting anything.

If people want to trade goods and do not have enough money to carry out their exchanges, they can always create more. Money itself is not the problem, as the spending and stimulus story suggests. What you spend is what you produce. You can only spend what you produce. (If you borrow and spend, you must eventually pay that back with your production.) If Iowa corn farmers want to buy Chinese pots and pans, they have to produce corn. If the Chinese want to buy Iowa corn, they have to produce pots and pans. They don’t want our dollars to eat anymore than we want their yuan to cook with; these currencies are only media of exchange. We can always arrange means of paying each other. The real problem is that the production of goods has been dis-arranged and that many firms have to restructure. Many will go bankrupt and liquidate. Many will lay off workers. The adjustments take time. This is not now a problem of money and credit, although it was brought about by central banking’s excessive money and credit. It is now a problem of real production being interrupted because it is not geared to producing what people want to and can buy at current prices. When a lot of us do not have the means to spend, it is because we are not producing enough product that others want at prices they are willing to pay. That happens because inflation has distorted the price system and production.

In this situation, government spending does not restore the production system to one that caters to people’s wants and demands. Government spending does the opposite. It induces men and materials into work that is not in demand. This lengthens the period of adjustment back to normal production. It causes even more distortion by bidding labor and materials away from businesses and into lines of work promoted by government. It creates a new inflation and price distortions that must cause more depression. Furthermore, as we know, the government spending itself is on wasteful activities.

The government spending under Bush and Obama is piling up immense new liabilities and debts. Americans are trying to save more. The data on their private account show this clearly. The personal savings rate in January of this year is 5 percent. From 2005 to April of 2008, it averaged just under 0.5 percent. Meanwhile their government is frustrating their actions by incurring immense new debts.

Sadly, spending is not the end of the story of the Obama administration. Its tax and regulatory policies are equally destructive. It is certain that higher capital gains taxes, estate taxes, income taxes, and carbon taxes will provide new depressing effects on the American economy. The federal government’s projects now include a growing array of wealth-destroying investments that include AIG, Citigroup, Fannie Mae, Freddie Mac, the auto industry, and other major banks.

Since the Democrat victory in November, the stock market has been discounting these negatives. It will continue to do so as long as these negatives continue and worsen. At present, the Obama administration is still serving up a daily diet of negative shocks to the economy and the stock market. It is frustrating the recuperative powers of Americans, just as it is frustrating their attempts to save and put the American house in order. If this is not an example of the evils of our federal government and of our form of representative constitutional government, I don’t know what is.

[JohnSmith2007 353]

A libertarian anarchist isn't mainstream. He may be an economist, but the above piece reads more like an opinion piece than a real analysis of FDR's economic policies.

I get it, mainstream is code for people you agree with. By that definition you are right, there are no "mainstream" economists that think FDR made things worse.

[luckytxn 2,264]

Here is a wiki from austrian economists.

From June 1914 to January 1920, when demand deposits grew by 96.9 percent, time deposits rose by 126.1 percent. In the great boom of the 1920s, that started after the recession of 1920–21 (a short recession, thanks to the budget cutting and lowering of taxes byWarren Harding^[2]), total demand deposits rose from 1921 to 1929 by 36.5 percent. Time deposits in banks expanded in the same period by 75.9 percent. The great boom of the 1920s (also called "Roaring Twenties") was largely fueled by credit expansion going into time deposits. The greatest expansion of time deposits came in Central Reserve Cities (New York and Chicago), where the Fed’s open market operations were all conducted, as opposed to Reserve Cities and Country Banks. As acknowledged by Federal Reserve officials, time or savings deposits were then, for all practical purposes, equivalent to demand deposits and should be paid on demand in case of a run on a bank.

With the passage of the Federal Reserve Act, President Wilson appointed Benjamin Strong to the most powerful post in the Federal Reserve System, Governor of the Federal Reserve Bank of New York. He made quickly this position dominant in the System and decided on Fed policy without consulting or even against the wishes of the Federal Reserve Board in Washington. Strong was the dominant leader of the Fed from 1914 until his death in 1928. He pursued an inflationary policy, to finance the war effort for WWI, connected to the interests of the House of Morgan. Another motivation was the attempt to prop up the Bank of England in the 1920s, when it returned to the gold standard with an overvalued pound. To prevent the loss of gold to the States, its governor Montagu Normansecretly convinced Strong to inflate in order to help England. The expansion ended only after Strong's death and the Great Depression followed soon after. In 1928 Strong admitted that "very few people indeed realized that we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis" - that is, to help Britain maintain a phony and inflationary form of gold standard.^[3]

The inflation was also motivated by a desire to help American exporters (particularly farmers), by stimulation of foreign lending. At the same time the U.S. turned to a sharp protectionist policy with the Fordney–McCumber Tariff of 1922. In the foreign lending boom, other countries were hampered in trying to sell their goods to the United States, but were encouraged to borrow dollars. The government did not have any peacetime authority to interfere with loans, but did so illegally. In 1921, President Harding and his cabinet conferred with several American investment bankers, at the instigation of Secretary of Commerce Hoover, to be informed in advance of foreign loans, so that the government "might express itself regarding them". The bankers agreed. Hoover commented that even bad loans helped American exports and provided a cheap form of relief and employment. Later Hoover demanded from bankers, that foreign loans would be inspected by agents of the Department of Commerce. Both requests were mostly ignored. While admitted to be legally unenforceable, it was all in the name of "national interests".^[4]

See also: Federal Reserve System[/url]

editThe Crash

The great boom of the 1920s began around July, 1921, after a year or more of sharp recession, and ended about July, 1929, when the production and business activity began to decline, although the came in October of that year. , an avid proponent of interventionism became President. Characteristic for him were "voluntary" measures that the government desired, with the implicit threat that if business did not "volunteer" properly, compulsory controls would soon follow.

After the stock-market crash, Hoover began a series of conferences with big business and labor leaders, telling them that cutting wage rates (the standard response in previous depressions) would be disastrous, because then the workers wouldn't make enough to buy the products. This "liquidation" of labor would only deepen the depression by reducing their "purchasing power". Leading industrialists have pledged to maintain wage rates, expand construction, and share any reduced work. At the same time, the Federal Reserve expanded rapidly and lowered its interest rates. Its member banks expanded their deposits in the last week of October 1929 alone by 10%, mostly in New York. Hoover praised the Fed for the saving of shaky banks and restoring confidence. The depression should be over in a few months. A large public works program was also initiated.

Hoover promised the farm bloc to support farm cooperatives and prices and established the (FFB). It would make all-purpose loans to farm cooperatives at low interest rates and establish "stabilization corporations" to control farm surpluses and bolster farm prices. Its board was dominated by representatives of these farm cooperatives. To combat falling prices, it made loans to farmers to keep wheat and cotton off the market and later started to buy the surpluses. For a while, prices were held up and farmers increased production, only to find that prices would fall even more. As America held wheat off the market, it lost its former share of the world’s wheat trade. The farmers were urged to decrease their acreage, while the government still promoted reclamation projects to increase farm production. The surpluses of wheat accumulated and prices fell to such a degree, that the FFB decided to dump wheat stocks abroad, resulting in a drastic fall in market prices. The attempts to keep up the price of cotton, wool, livestock, etc. failed as well. A "" was declared to stop production, The movement soon turned to violence and failed to stop the falling farm prices. but succeeded to avoid some foreclosures of its members.

In 1930, the was passed, despite objections of many economists and industrial leaders. Hoover originated a higher tariff on agricultural products to help farmers, but it was raised on many other products. Many other countries have retaliated with their own tariffs and foreign trade declined significantly. (From 1929 to 1932, U.S. imports from Europe decreased from $1,334 million to just $390 million, while U.S. exports to Europe decreased from $2,341 million to $784 million. Overall, world trade decreased by some 66% between 1929 and 1934.) Also, to relieve the unemployment problem, and to help keep wage rates up, the President effectively banned further immigration into the United States.

[edit]In Europe

In Europe, the crisis began in earnest with the Boden–Kredit Anstalt, the most important bank in Austria and Eastern Europe. It had to merge with the after rescue attempts by its government and other banks. When Austria declared a customs union with Germany in March 1931, the French government feared this development and several French banks suddenly insisted on redemption of their debts from both countries. The bank collapsed. After more rescue attempts has the Austrian Government voted a $150 million guarantee to the bank, but the its credit was by the time worthless, and Austria soon declared national bankruptcy by going off the gold standard. Later, Germany, England, and most other European countries renounced their obligations and went off the gold standard as well. While the impact on United States was not very large due to the lowered international trade, it certainly did not help, neither did the many loans granted to prop up foreign banks.

edit1931, "The Tragic Year"

The crisis worsened in the US in 1931. Production continued to fall drastically, as did prices and foreign trade, and unemployment ran up to almost 16 percent of the labor force. The Federal Reserve Board (FRB) index of manufacturing production, which had been 110 in 1929 and 90 in 1930, fell to 75 in 1931. Hardest hit, in accordance with Austrian , were producers’ goods and higher order goods industries, rather than the consumer goods’ industries. Despite attempts to inflate, bank deposits and the aggregate fell sharply, particularly at the end of the year. The British abandoning of the gold standard, bank failures abroad and the growing number of failures at home, caused a growing loss of confidence by Americans in their banking system. The wages were also beginning to fall, first secretly, then openly by the end of 1931.

The gross national product fell from $91.1 billion in 1930, to $76.3 billion in 1931. Total government receipts fell from $13.5 billion to $12.4 billion, but total government expenditures rose from $13.9 billion to $15.2 billion, in federal, rather than state and local, spending (federal expenditures rose from $4.2 billion in 1930 to $5.5 billion in 1931). In the middle of a great depression when people needed to be relieved of governmental burdens, the dead weight of government rose from 16.4 percent to 21.5 percent of the gross private product. From a modest surplus in 1930, the Federal government so ran up a huge $2.2 billion deficit in 1931.

Direct relief was just about the one sphere where President Hoover seemed to prefer voluntary to governmental action. The opposed a bill, in early 1931, that would grant it $25 million for relief, declaring that it would "to a large extent destroy voluntary giving". Many private charity organizations, philanthropists, and social workers had the same views. Governmental unemployment relief was seen to have a role in creating and perpetuating unemployment in Britain (the "dole"). It was attacked by many business leaders, including , the leaders of the and the , and former President .

edit1932, The Hoover New Deal

In an atmosphere of crisis, President Hoover called for more drastic measures, including more government aid and loans. With a $2 billion deficit during annual year 1931, Hoover felt that he had to do something to combat it and chose to increase the taxes. The was one of the greatest increases in taxation ever enacted in the United States in peacetime. Many wartime excise taxes were revived, sales taxes were imposed on gasoline, tires, autos, electric energy, malt, toiletries, furs, jewelry, and other articles; admission and stock transfer taxes were increased; new taxes were levied on bank checks, bond transfers, telephone, telegraph, and radio messages; and the personal income tax was raised drastically as follows: the normal rate was increased from a range of 1½ percent–5 percent, to 4 percent–8 percent; personal exemptions were sharply reduced, and an earned credit of 25 percent eliminated; and surtaxes were raised enormously, from a maximum of 25 percent to 63 percent on the highest incomes. Furthermore, the corporate income tax was increased from 12 percent to 13: percent, and an exemption for small corporations eliminated; the estate tax was doubled, and the exemption floor halved; and the gift tax, which had been eliminated, was restored, and graduated up to 33⅓ percent. The postal rates were raised as well.

Despite the drastic increase in tax rates, total Federal revenue for 1932 declined because of the deepened depression—itself partly caused by the increase in tax rates. Total Federal receipts, excluding government enterprises, declined from $2.2 billion in 1931 to $1.9 billion in 1932; including government enterprises, Federal receipts fell from $3.4 billion to $3 billion.

Total government receipts fell from $12.4 billion to $11.5 billion. As a result, the huge Federal deficit continued despite a drop in government expenditures in 1932: Federal expenditures falling from $5.5 billion to $4.4 billion, and aggregate government expenditures falling from $15.2 billion to $13.2 billion (all numbers including government enterprises). Of the $1.7 billion in total government deficit, the bulk of it — $1.4 billion — was in the Federal government account. The state and local governments were forced to cut back their expenditures to near the level of their dwindling receipts. One of the most ominous projects for Federal spending during 1932 was a Congressional move for a huge $2 billion veterans bonus, to be financed by an issue of new currency. It was its final defeat in the Senate in June that did most to defeat a general clamor for much larger government spending.

Meanwhile, however, President Hoover himself was beginning to have doubts about one of his favorite policies: public works. In a conference at the end of February, Hoover admitted that his public works program, which had nearly doubled Federal construction since the start of the depression, had failed. It was very expensive, costing over $1200 per family aided, it was unavailable to the needy in remote regions and to those who were unable to perform such labor, which was, after all, unskilled make-work. By May, Hoover had openly reversed his earlier position. As a result, Federal public works only increased by $60 million in 1932, to reach the $333 million mark. Public works was not to come really to the fore again until the Roosevelt administration.

If Hoover eagerly embraced other forms of , he gave ground but grudgingly on one issue where he had championed the voluntary approach: direct relief. Governor of New York led the way for state relief programs in the winter of 1931–1932, and he induced New York to establish the first state relief authority: the Temporary Emergency Relief Administration, equipped with $25 million. Other states followed this lead, and a bill was introduced for a $500 million federal relief program. The bill was defeated, but, with depression deepening and a Presidential election approaching, the administration all but surrendered, passing the of July, 1932 — the nation’s first Federal relief legislation. All in all, total public relief in 120 of the nation’s leading urban areas amounted to $33 million in 1929, $173 million in 1931, and $308 million in 1932.

One thing Hoover was not reticent about: inflation. The administration first cleared the path for the program by passing the in February, which (a) greatly broadened the assets eligible for rediscounts with the Fed, and (b) permitted the Federal Reserve to use government bonds as collateral for its notes, in addition to commercial paper. At the end of February, 1932, total bank reserves had fallen to $1.85 billion. At that point, the launched a gigantic program of purchasing U.S. government securities. By the end of 1932, total reserves had been raised to $2.51 billion. This enormous increase of $660 million in reserves in less than a year is unprecedented in the previous history of the System. If the banks had kept loaned-up, the money supply of the nation would have increased by approximately $8 billion. Instead, the money supply fell by $3.5 billion during 1932, from $68.25 to $64.72 billion at the end of the year, and with the bank deposit component falling by $3.2 billion. Until the second quarter of 1932, the nation’s banks had always remained loaned up, with only negligible excess reserves. After, the banks accumulated excess reserves, and it is estimated that the proportion of excess to total bank reserves rose from 2.4 percent in the first quarter of 1932, to 10.7 percent in the second quarter. By the fourth quarter of 1932, excess reserves were estimated to a double of 20.3 percent of total bank reserves.

During the 1920s, a typical year might find 700 banks failing, with deposits totaling $170 million. In 1930, 1350 banks failed, with deposits of $837 million; in 1931, 2,293 banks collapsed, with deposits of $1,690 million; and in 1932, 1,453 banks failed, having $706 million in deposits. This enormous increase in bank failures was enough to give any bank pause—particularly when the bankers knew in their hearts that no bank (outside of the nonexisting ideal 100 percent bank) can ever withstand a determined run. Consequently, the banks permitted their commercial loans to run down without increasing their investments. Inflation by the government was turned into deflation by the policies of the public and the banks. The American economy reached the depths of depression during 1932 and 1933, and yet it had begun to turn upward by mid-1932. It is not far-fetched to believe that the considerable deflation of July 1931–July 1932, totaling $7.5 billion of currency and deposits, or 14 percent, was partly responsible for the mid-summer upturn.

As the Depression got worse and people lost their confidence in the banks, they decided to take custody of their cash. Seeing people in large numbers pulling their money out of banks — money the banks had promised to provide on demand — President Hoover blasted them for their "traitorous hoarding." He organized an antihoarding drive and delivered a radio address (, pdf) in which he pleaded with the public to stop hoarding (i.e., to stop converting their bank deposits into cash).

Nominal paychecks fell much more slowly during the early years of the Great Depression than the general level (wholesale prices fell by 10 percent in 1930, by 15 percent in 1931) - and those who kept their job experienced a higher increase in real (inflation-adjusted) wages, than during the Roaring 1920s! And so has unemployment reached record highs during Hoover's first and only term. When FDR went back on the US government's promise to redeem dollars for gold, the Federal Reserve could flood the economy with new dollars, the prices began to rise again. Because wage rates were not allowed to fall to their new, market-clearing level, the currency has paradoxically reduced unemployment.

The Fed has expanded bank reserves in the 1930s. Panicking at the inflationary potential, it doubled the minimum reserve requirements to 20 percent in 1938, sending the economy into a tailspin of credit liquidation. The Fed, ever since that period, has been very cautious about the degree of its changes and changed bank reserve requirements fairly often, but in very small steps, by fractions of one percent.

After 1933, Federal Reserve Notes and deposits were no longer redeemable in gold coins to Americans, their gold was confiscated and exchanged for Federal Reserve Notes, which became legal tender; and Americans were stuck in a regime of fiat paper issued by the government and the Federal Reserve.

[edit]Tax revolt in the USA

There has been a widespread opposition to real estate taxes in cities across America and some Americans were in fact not paying their taxes. The movement declined quickly, some scholars acknowledge certain influence, but ultimately declare it a failure. Others consider it a resounding success, however.

President Hoover's massive tax increase bill that passed into law as the , with many new taxes. The most burdensome taxes for many Americans, however, was the property tax. Property taxes required taxpayers to make an explicit tax payment of significant size from which they could not evade without losing what was often their most significant piece of property and wealth. The property taxes have risen in the decade before the Depression; throughout the 1920s, the general property tax accounted for over 90 percent of taxes levied by all cities over 30,000 in population. One reason for this dependence was that alcohol revenue from sales taxes and licenses had "dried up" due to prohibition. The burden of taxes increased significantly, even if tax rates remained the same. Another source of taxpayer ire was that the real wages of public employees rose nearly 12% between 1929 and 1933.

Tax delinquency increased from its normal rate of 10% to more than 30%. Tax protest organization formed quickly and spontaneously in rural regions in response to tax authorities selling the land of farmers. Estimates placed the number of taxpayer organizations at between 3,000 and 4,000 organizations nationwide.

The tax limitation movement was effective in several states in establishing cuts and limitations on property tax rates. The second success, which was both more important and far less obvious, was the passage of the 21st Amendment that repealed alcohol . The legalization of alcohol sales in most states provided federal, state, and local government with increased tax revenues to offset cuts in property taxes while simultaneously providing a drastic decrease in the price of alcohol and in effect granting the American public a type of tax cut. Income tax revenue fell 60% from 1930 to 1933 placing a severe financial constraint on Congress. The search for an alternative revenue source led to the conversion of F.D.R. from a "dry" to a "wet" and resulted in the 1932 Democratic party platform to call for Repeal in order to provide "a proper and needed revenue." Revenue shortfalls made Repeal possible and the alcohol tax provided 13% of all federal revenue by 1936.

edit1933, end of Hoover's term

Seeking reelection, Hoover boasted of his many interventions with the economy. In his acceptance speech for the Presidential renomination he said:

"We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put that program in action."

After the election of , as the new Presidential term approached, dark rumors circulated about the radicalism of Roosevelt’s advisers, and of their willingness to go off the . Consequently, not only did gold "hoarding" by foreigners develop momentum, but even gold hoarding by domestic citizens. For the first time in the depression, American citizens were beginning to lose confidence in the dollar itself. The loss of confidence reached its apogee in February, 1933, the month before the Roosevelt inaugural. In that one month, the monetary gold stock fell by $173 million, and money in circulation increased by the phenomenal amount of $900 million, the reflection of domestic loss of confidence. Money in circulation totaled $5.4 billion at the end of January, and $6.3 billion by the end of February. $700 million of this increase was in Federal Reserve notes, and $140 million in gold coin and gold certificates.

The Federal Reserve did its best to combat this deflationary pull on bank reserves, but its inflationary measures only served to diminish confidence in the dollar still further. Total money supply fell from $64.72 to $61.61 billion over 1933, and all or more of this fall took place in the first half of the year. Bank failures skyrocketed during this period. The number of commercial bank failures increased from 1,453 in 1932 to 4,000 in 1933 (most of which took place in the first quarter).

The reaction to this growing insistence of the people on claiming their rightful, legally-owned property, was a series of attacks on property rights by state after state. One by one, states imposed "bank holidays" by fiat, permitting the banks to stay in business while refusing to pay virtually all of the just claims of their depositors. The bank holiday movement began in earnest with the proclamation of an eight-day holiday on February 14, 1933, by Governor William Comstock of Michigan. This precipitated the bank runs and deflation of the latter part of February and depositors began an intense scramble to take their money out of the banks. Many national banks, which had worked hard to keep themselves in an at least relatively sound position, did not want to use the special privilege of bank holiday, and had to be coerced into doing so.

By March 4, every state in the Union had declared a bank holiday, and the stage was set for President Roosevelt’s dramatic and illegal closing of all the banks. President Roosevelt closed down all the banks throughout the nation for an entire week, from March 6 to 13, with many banks remaining closed even longer. Restrictions against so-called "hoarding" were continued afterward, and much hoarded gold returned to the banks following a Federal Reserve threat to publish a list, for full public scorn, of the leading "gold hoarders."

Mr. Hoover left office in March, 1933, at the very depth of the greatest depression in American history. Production had fallen by more than one-half: industrial production had been at an index of 114 in August, 1929, and then fell to 54 by March, 1933. Unemployment was persisting at nearly 25 percent of the labor force, and gross national product had also fallen almost in half. Hardest hit was investment, especially business construction, the latter falling from about $8.7 billion in 1929 to $1.4 billion in 1933. The index of non-durable manufacturing production fell from 94 to 66 from August, 1929, to March, 1933—a decline of 30 percent; the index of durable manufactures fell from 140 to 32, in the same period, a decline of 77 percent. In durable goods industries (e.g., building, roads, metals, iron and steel, lumber, railroad, etc.) it was estimated that their total employment fell from 10 million in 1929 to 4 million in 1932–1933, while employment in consumer goods industries (e.g., food, farming, textiles, electricity, fuel, etc.) only fell from 15 million to 13 million in the same period. Stock prices (industrials) fell by 76 percent during the depression, wholesale prices fell by 30 percent, and the total money supply declined by one-sixth.

Wage rates were kept very high during the first two years of the depression. By 1932, however, with profits wiped out, the pressure became too great, and wage rates fell considerably. Total fall over the 1929–1933 period, however, was only 23 percent - less than the decline in wholesale prices. Therefore, real wage rates, for the workers still remaining employed, actually increased. While real average hourly earnings rose, actual hours worked in industry fell drastically during the depression. Weekly hours averaged over 48 in 1929, and fell to less than 32 by mid-1932. In no previous depression had hours worked fallen by more than 10 percent. This was a form of reduced employment caused by the high-wage policy. As a result, average weekly earnings fell by over 40 percent during the depression, and real weekly earnings fell by over 30 percent. But hardest hit were the unemployed, the percentage of whom rose to 25 percent by 1932–1933, and reached 47 percent in selected manufacturing industries. The fall in man-hours combined with the fall in average hourly earnings caused a truly precipitate drop in total factory payrolls - the base of the very "purchasing power" that the policy was supposed to sustain.

editThe New Deal

[edit]Roosevelt's Campaign

The Democratic platform of 1932 under which Franklin D. Roosevelt endorses several subsidies and regulations, but it hardly embraces the enormous expansion in federal power that FDR would achieve. The very first plank calls for "an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance to accomplish a saving of not less than twenty-five per cent in the cost of the Federal Government." Subsequent planks demand a balanced budget, a low tariff, the repeal of Prohibition, "a sound currency to be preserved at all hazards," "no interference in the internal affairs of other nations," and "the removal of government from all fields of private enterprise except where necessary to develop public works and natural resources in the common interest." The document concludes with a quote from Andrew Jackson: "equal rights to all; special privilege to none."

FDR's campaign reflected that platform. He accused Herbert Hoover of "reckless and extravagant spending," and he further denounced the Republican incumbent for believing "we ought to center control of everything in Washington as rapidly as possible." Even when he called for interventions in the economy, he generally couched his words in the old liberals' language of equal treatment rather than the new liberals' vision of enlightened central planning. In his famous Forgotten Man speech of April 1932 (see ), the Democratic candidate pointed to the wave of foreclosures sweeping the nation. Noting that Hoover had created a "two billion dollar fund...put at the disposal of the big banks, the railroads and the corporations of the Nation," FDR averred that the government should "provide at least as much assistance to the little fellow as it is now giving to the large banks and corporations." Once in office, the new administration did indeed repeal Prohibition, and it eventually lowered some trade barriers as well. By the time of FDR's death, the federal bureaucracy's power had grown so enormously that Hoover was widely remembered as the last apostle of laissez faire.

[edit]Policy

A principal feature of economic policy was government-sponsored industrial cartels (the ); agricultural cartels (the ); and labor cartels (the and ). The purpose of any cartel is to restrict output and raise prices. Lower levels of production leads to higher unemployment, which is exactly what the NRA and AAA did.

The NRA was almost identical to the Italian corporatist system that existed at the time. In Italy each trade or industrial group was organized into a government-controlled "corporative" association that had the power to plan production and pricing. In the U.S. the NRA organized each industry into federally-supervised trade associations called "Code Authorities" which could also limit output and set prices. The antitrust laws were explicitly set aside.

Over 700 industrial codes were created and were rigorously enforced by thousands of government code enforcers who, "could enter a man's factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant." A hapless New Jersey tailor named Jack Magid became nationally famous after he was arrested, convicted, and imprisoned by the code police for the "crime" of pressing a suit of clothes for 35 cents when the Tailors' Code fixed the price at 40 cents. The NRA was ruled unconstitutional by the U.S. Supreme Court on May 27, 1935. A study of the Act noted that "the licensing provision, giving the president the power of life or death over business enterprises, is the ultimate weapon of enforcement and the capstone of the powers granted to the president ... the most extraordinary extension of presidential power in American history." The Supreme Court's decision has noted, that 'fair competition' is not defined in the law and could be a convenient designation for whatever set of laws that is proposed and the president may approve. It ruled that NIRA was "an unconstitutional delegation of legislative power."

But after of 1937, the justices succumbed to whatever creative definition of fairness that Congress or federal agencies chose to proclaim. For instance, in 1942, Congress passed the Emergency Price Control Act, which created an Office of Price Administration. The OPA had sweeping power to set or strike down prices in any industry or activity that it considered to be "defense-related" — a vague term that could have encompassed practically the entire national economy. The act contained no substantive guidelines for the administrator's decisions but merely required prices that "in his judgment will be generally fair and equitable."

[edit]Effects

The Roosevelt administration also orchestrated various price-fixing schemes in labor markets, principally for the benefit of unions. Payroll taxes to finance Social Security and Unemployment Insurance programs increased employers' wage bills even further, which also reduced the level of employment. According to an econometric estimate, government-mandated payroll cost increases added nearly 1.2 million people to the unemployment rolls by 1938.

The unemployment rate during the 1933-1940 period averaged about 18% and was as high as 28.3% in March of 1933. By the end of 1938, on the eve of World War II, the U.S. unemployment rate still hovered at just over 18 percent and was higher than it was in 1933, President Franklin D. Roosevelt's first year in office. This occurred despite (or rather, because of) six years of unprecedented levels of government intervention into the U.S. economy. The American recovery was slower than in most European nations; by 1937 Great Britain's unemployment rate had declined to 10.3 percent.

Herbert Hoover's was greatly expanded by Roosevelt, but its effect was to make capital markets less efficient, thereby prolonging the Depression even further. As explained by RFC director Jesse Jones in his autobiography, Fifty Billion Dollars, "The law specified that we should lend only where the borrower could not get the money from others on reasonable terms." That is, only to uncreditworthy borrowers. Guided by this directive, Jones and the RFC redirected billions of dollars in valuable capital to politically-connected but economically-questionable businesses. "We even loaned money to [the owners of] a drove of reindeer in Alaska," Jones boasted. The RFC was abolished in the 1955 under a cloud of corruption and scandal.

Roosevelt's public works programs may have been an economic failure, but they were a resounding political success as they provided virtually unlimited opportunities for political patronage. In 1939 a special U.S. Senate Committee on Campaign Expenditures investigated the programs and found that in many states workers were required to sign a pledge to vote Democratic and, in some cases, to make campaign contributions, as a condition of employment. Businesses that sold supplies to the government were in some places required to make campaign contributions to the Democratic party in return for the contracts. The New Deal was largely a legalized shake-down operation.

Roosevelt's billions, adroitly used, had broken down every political machine in America. The patronage they once lived on and the local money they once had to disburse to help the poor was trivial compared to the vast floods of money Roosevelt controlled. And no political boss could compete with him in any county in America in the distribution of money and jobs.

As Henry Morgenthau, the secretary of the treasury and one of the most powerful men in America, said before the Democrats on the House Ways and Means Committee in 1939:

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong...somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises....I say after eight years of this Administration we have just as much unemployment as when we started....And an enormous debt to boot!"

editDuring World War II

The recovery from the Great Depression in the United States is usually associated with the advent of World War II, a period when real GDP appeared to increase phenomenally and the rate of unemployment fell almost to zero. By using hours worked as measure of employment, a different picture emerges, with large government "make-work" programs at first and military employment during the war - but a very slow actual recovery (only in 1941, with the population vigorously engaged in mobilization for war, did total work hours exceed the 1929 value, by 3 percent).

Private investment has fallen significantly. Gross private investment plunged from almost 16 percent of GDP in 1929 to less than 2 percent in 1932; recovered to 13 percent in 1937 before falling again in the recession of 1938; and as late as 1941 stood at only 14 percent. During the war years, private investment ratios ranged from 3 to 6 percent. From 1946 through 1950 they ranged from 14 to 19 percent and averaged 16 percent — the same as in 1929. In 1929, when gross private investment was $16.2 billion, net investment was $8.3 billion. Net investment fell precipitously to $2.3 billion in 1930 and then became negative during each of the following five years. For the eleven-year period of 1930 to 1940, net private investment totaled minus $3.1 billion. Only in 1941 did net private investment ($9.7 billion) exceed the 1929 amount. During the 1930s, private investment remained at depths never plumbed in any other decade for which data exist.

One hypothesis is, that the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty for the investors. Given the unparalleled outpouring of business-threatening laws, regulations, and court decisions, the oft-stated hostility of President Roosevelt and his lieutenants toward investors as a class, the political climate could hardly have failed to discourage some investors from making fresh long-term commitments. There also exists a great deal of direct evidence that investors felt extraordinarily uncertain about the future of the property-rights regime between 1935 and 1941. Historians have recorded countless statements by contemporaries to that effect; in the years just before the war most business executives expected substantial weakening of private property rights ranging up to "complete economic dictatorship".

[luckytxn 2,264]

Obama's big spending fallacy could ruin the US economy: a history lesson

Gerry Jackson

BrookesNews.Com

Monday 3 August 2009

I'm inclined to the view that the Great Depression was a seminal turning point in the history of economic thought. Thanks to that politically-induced tragedy something like 150 years of sound economic reasoning was overturned by two mercantilist fallacies that we now call Keynesianism, the first of which was the demand deficiency fallacy. This clearly leads to the second fallacy that increased government spending can promote growth, especially by encouraging consumer spending^1,2. Both fallacies are responsible for the present economic crisis.

I have been publishing data for years that refutes both fallacies. Unfortunately Keynesianism seems to have taken on the characteristics of a cult that brooks no opposition — including contradictory evidence. Nevertheless, facts are facts and the idea that a high level of consumption as a proportion of GDP is needed to prevent unemployment from rising has been thoroughly refuted by statistical evidence as the following table amply demonstrates.

YearUS

Jobless¹Canadian

Jobless ²Personal

consumption>

as a % of GNP ³PARWFederal spending as a % of GDP⁴Total public debt1929 3.2 3.175.71003.6816.931930 8.7 9.177.91134.3416.19193115.911.680.31255.3716.80193223.617.684.31287.2719.49193324.919.382.81309.0522.54193421.714.579.81259.0027.05193520.114.277.611710.30 28.70193616.912.875.711410.94 33.78193714.3 9.174.11229.5836,42193819.011.475.81329.8137.16193917.211.474.213410.04 40.44¹Source: Bureau of labor Statistics Canada.

²Productivityadjusted real wage

³St. Louis Fed: Survey of Current Business: 1955

⁴Source: US Department of Commerce, NIPA, 1929-1976 Statistical Tables, September 1981.

What's amusing about this table is that it reveals the so-called laissez-faire Hoover as doubling government spending as a proportion of GDP. (Hoover was well known at the time to being strongly opposed to laissez-faire policies. Thanks to the dishonest efforts of leftwing historians this fact has been turned on its head). This increased spending in dollar terms was far from trivial. Robert P. Murphy points out that for the financial year 2007 the Bush administration would have had to run a deficit of $3.3 trillion to equal Hoover's "overspending". (Robert P. Murphy, The Politically Incorrect Guide to the Great Depression and the New Deal, Regnery Publishing Inc., 2009, p. 47).

The data also demolishes the idea that debt is counter-cyclical. From 1930 to 1939 total debt rose by 150 per cent and yet America continued to be cursed by widespread unemployment. (Debt is expected to be 101 per cent of GDP in 2010). So how do we account for the very high level of unemployment? What matters to employers is the cost of labour relative to the value of its marginal product. (Every introductory economics textbook explains this process). It obviously follows that if the cost of labour (the gross wage) exceeds the value of its product persistent unemployment will emerge.

The fourth column in our table contains the productivity adjusted wage. This is arrived at by dividing productivity by the real wage. We can now see that real wages did indeed exceed productivity — and to a considerable degree — with the tragic results that economic theory predicts. No matter which indexes are used the result is always the same: excess wage rates. What makes the third column particularly interesting is that though Canada had no New Deal her employment record during the 1930s was vastly better than the US's to the extent that on average the US unemployment rate was 3.9 per centage points higher. (Murphy, ibid., p. 104). An important fact that is usually overlooked is that the great bulk of the unemployed were in manufacturing. In 1934 it was calculated

that of a total of almost 14 million persons were without jobs at the peak of unemployment in March, 1933, 6½ million were from the durable goods industries, nearly 6 million were from the "service" industries, and only 1½ million were from the consumption goods industries. Investment activity, in a word, is the tail that wags the industrial dog. (C. A. Phillips, T. F. McManus and R. W. Nelson,

Banking and the Business Cycle

, Macmillan and Company 1937, p. 235).

It was noted at the time and is borne out by the figures in the table that consumption was in fact being maintained and that it was the producer goods industries that were suffering the most, a fact that Joseph Stagg Lawrence, an eminent economist, tried to point out to the public. (The same thing happened during 2000 and 2001 recession). It was patently clear to the more astute economists that consumer spending was not the key to recovery.

Unfortunately for Australia Prime Minister Rudd is as profoundly ignorant of economics and economic history as is President obama. Rudd is arguing that the Premiers’ Plan of 1931 that resulted in public spending cuts deepened the depression and raised the level of unemployment. However, Sinclair Davidson, a Professor in the School of Economics, Finance and Marketing at RMIT, produced a chart showing that unemployment not only peaked in 1931 it then began to fall despite government spending cuts.

Why? He doesn't say but the following chart provides a clue. Unemployment peaked when productivity reached its lowest point, after which it began to rise as did the demand for labour. But for this to happen the productivity adjusted wage would have to fall. The real wage in manufacturing for full-time labour in 1927-28 equalled 100. In 1930-31 it was still 100. For 1936-37 it was 99. During this period it never fell below 98. (C. B. Schedvin, Australia and the Great Depression, Sydney University Press, 1988, p. 350).

Source: Recovery from the Depression: Australia and the World Economy in the 1930s, Cambridge University Press, edited by R. G. Gregory & N. G. Butlin, 2002,p. 268

Now we have our answer. When productivity fell the productivity adjusted real wage rose which then raised the level of unemployment. Once productivity began to increase again this reduced the productivity adjusted real wage and so increased the demand for labour. Therefore government increased borrowing and government spending had absolutely nothing to do with it. This the lesson of the 1930s and one the classical economists understood. Mill spoke for them when he wrote:

The utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained. Taxes are not now esteemed to be 'like the dews of heaven, which return in prolific showers'. It is no longer supposed that you benefit the producer by taking his money, provided that you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasoning of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow; that the man who steals money out of a shop, provided that he expends it all again at the same shop, is a public benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman a fortune. (John Stuart Mill,

Essays on Economics and Society

, Collected Works of John Stuart Mill, Vol. I, University of Toronto Press 1967, pp. 262-63).

Unfortunately President Obama and his advisors are hell bent on imposing on America unsustainable deficits and spending for which there is no economic justification and whose only result will be a great weakening of the economy. Only an unreasoning and fanatical belief in the power of state can account for such behaviour.

1. The immediate post-war economic situation is highly instructive in that it completely explodes the Keynesian idea that government spending is vital if unemployment is to be prevented from rising. Between 1945 and 1947 the Truman government slashed Federal annual spending from $95 billion to $36 billion — a $59 billion cut in two years, a 62 per cent reduction that amounted to 26 per cent of GDP as it stood in 1945. Instead of the mass unemployment that Paul Samuelson confidently predicted would emerge when the war ended and government spending was slashed America entered an unprecedented period of prosperity.

2. In fact, recovery was already underway before Roosevelt could implement his destructive New Deal policies. Roosevelt was inaugurated on 4 March 1933. I don't want to be a party pooper but the depression bottomed out "in the late winter of 1932-33" and recovery was clearly underway in the February-March period with the Federal Reserve Index of Production rising from 60 to 100 in July. (Frederick C. Mills Prices in Recession and R

[luckytxn 2,264]

The New Deal Hurt the Economy

April 12, 2010 by Dan Mitchell

A great column in the Wall Street Journal explains how FDR’s policies hurt the economy. That is true, but the really interesting part of the column for me is that it explains how Roosevelt (and then Truman) were convinced the economy would return to depression after World War II unless there was another giant Keynesian plan. Fortunately, Congress said no. This meant there was no repeat of the Hoover-Roosevelt mistakes of the 1930s and the economy was able to recover and enjoy strong growth:

FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II. Let’s start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good. …His key advisers were frantic at the possibility of the Great Depression’s return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the “right to a useful and remunerative job” provided by the federal government if necessary. Roosevelt died before the war ended and before he could implement his New Deal revival. His successor, Harry Truman, in a 16,000 word message on Sept. 6, 1945, urged Congress to enact FDR’s ideas as the best way to achieve full employment after the war. Congress—both chambers with Democratic majorities—responded by just saying “no.” No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits. Instead, Congress reduced taxes. Income tax rates were cut across the board. …Corporate tax rates were trimmed and FDR’s “excess profits” tax was repealed, which meant that top marginal corporate tax rates effectively went to 38% from 90% after 1945. Georgia Sen. Walter George, chairman of the Senate Finance Committee, defended the Revenue Act of 1945 with arguments that today we would call “supply-side economics.” If the tax bill “has the effect which it is hoped it will have,” George said, “it will so stimulate the expansion of business as to bring in a greater total revenue.” He was prophetic. By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. …Congress substituted the tonic of freedom for FDR’s New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

[luckytxn 2,264]

Channeling Milton Friedman

The great free-market economist isn't around, but his coauthor is. And Anna Schwartz is not happy.

Anna Schwartz is 93 and has been working at the same place since 1941. She's that rarity in economics, or indeed any field: a living legend from another era who hasn't lost a step mentally and who grasps everything that's going on around her in the present. Or at least she seems to—but more on that later. Schwartz is one of the most renowned monetary scholars in the world. She's the woman who authored, with Milton Friedman, The Monetary History of the United States—the book that launched the free-market counterattack against Keynesianism in the early '60s. And now, as she surveys the wreckage of the last two years, Schwartz has one thought: if only Milton were here. "Ever since his death I have lamented the fact that he has not been around to express his views on what's going on," she told me the other day at her mid-Manhattan office at the National Bureau of Economic Research.

Despite constant criticism of the Obama administration and the Federal Reserve over their handling of the financial crisis, opponents of their policies don't have a leader—especially on the right. Their problem is "the big lack of a voice like Friedman's, someone who's got instinctive understanding of the way markets operate, a very profound knowledge of history," Schwartz told me. Had Friedman been around to speak out (he died in 2006), "I don't believe we would have had a Fed balance sheet currently that has doubled, or tripled, in such a short period of time without any kind of Fed acknowledgment that it was creating a problem for itself [with] inflation already baked into the economy." In clear, strong tones marked by her New York accent, Schwartz said: "Everybody's talking about what kind of exit strategy does the Fed have, given that its balance sheet has exploded. It's something [Fed chair Ben Bernanke] doesn't discuss. It's as if he isn't willing to acknowledge that it is a problem."

Slamming the Fed, of course, is old hat for Schwartz and her alter ego, Friedman. They concluded in Monetary History that had the Federal Reserve not existed, the Great Depression might never have happened. Their argument: the Fed bungled things by tightening money from 1929 to 1932, something the New York bankers who used to be in charge of resolving crises would never have done. But Schwartz says that Friedman—who along with John Maynard Keynes, his polar opposite in thought, was the 20th century's most influential economist—would be just as disturbed by what Barack Obama is doing today. "Obama nowadays is the typical believer that government can do everything. So he's going to change the way electricity is produced in this country. He's going to change the way energy is going to be produced in this country. And it's all going to be a government effort. And Friedman would say, 'Look, if these really are such desirable things, why isn't it that the private sector has taken advantage of an opportunity to make money and to improve things?' "

Schwartz is more than a prominent voice for free markets; she is a breathing intellectual link to the Depression and its lessons. All of modern economics—and every major debate currently raging over the financial crisis—dates back to the 1930s. All the policy options we now discuss without even thinking about them—deficit spending, monetary policy, the role of the Fed, government intervention in general—spring out of what economists learned from that period. It was thanks to the Depression that Keynes created macroeconomics. It was in response to the Depression, and his finding that the Fed dramatically deepened it by tightening money supply, that Friedman developed his theory of monetarism, rebutting Keynes. (Monetarism holds that the money supply is the primary driver of prosperity and recession, and that Keynesian fiscal spending doesn't work. Government should therefore stay out of the way, other than to adjust the money supply.) And it was because of the Depression that Bernanke, another renowned scholar who studied its causes, expanded the Fed's lending by more than $2 trillion, angering Anna Schwartz.

Schwartz's criticism is unpleasant to hear for Bernanke, who has long admired both her and Friedman. He has said that reading Monetary History "hooked" him on monetary economics when he was an MIT student. Against her arguments now, Bernanke has one main counterargument, and it's a pretty good one: if he hadn't done what he did, we would be in another depression. The banking and financial system would have melted down; ironically enough, the near meltdown that occurred after the collapse of Lehman Brothers last September, which Bernanke was criticized for, is the best proof of that. Bernanke knows more about this than perhaps anyone in the world; the academic work for which he was most noted showed that a serious recession became the Great Depression when, in the critical three and a half years between the 1929 stock-market crash and FDR's New Deal, the Hoover administration allowed a third of the nation's banks to go under. As a result, Bernanke and Friedman/Schwartz are now considered the leading theorists of the Depression. Indeed, in a touching and generous gesture—considering the importance of his own work showing that bank failures were mainly responsible—Bernanke turned to the aging Friedman at a 90th-birthday celebration in 2002 and told him and Schwartz, who was there, "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we [the Fed] did it. We're very sorry. But thanks to you, we won't do it again."

He's made sure of that, by flooding the system with liquidity. The effect of Bernanke's actions has been to increase the money supply, which is what you might think Milton Friedman would have wanted. But Schwartz still believes that, as she told The Wall Street Journal last fall, Bernanke is fighting the last war. Yes, he's studiously taken the opposite course from what the Fed did in the early 1930s. But she maintains that the current crisis is less a liquidity problem and more a crisis of confidence because of the market's doubts about the toxic assets on banks' balance sheets. "What disturbed me particularly about Bernanke's performance was the insistence on bailouts," said Schwartz in a flood of passion. "If he had been absolutely candid to the markets and explained on what basis he would choose to bail out firms, and which ones he would not consider as meriting bailout, I think if the market had understood that he had principles and they would be able to understand a decision in light of these principles, there would have been much less bewilderment about why did they rescue Bear Stearns and pass over Lehman Brothers. Even though he has made a lot of rhetorical statements about the importance of transparency, he has not been transparent. I think that's a real failure. I think the Fed or the government has no business bailing out a firm that is not solvent."

Bernanke has no particular response to this criticism—the Fed did not respond to a request for comment. But I'll hazard a try at channeling him. Schwartz is right: this crisis is different from the Great Depression. But it's because this is true that it might be a little unfair to judge his actions in the way Schwartz does. First, it's no accident that neither Bernanke, then-Treasury Secretary Hank Paulson, nor current Treasury Secretary Tim Geithner has found any effective way to dispose of the toxic assets. For most of the past 10 months or so, selling them at any price the market might pay would have made many of the major banks automatically insolvent. Which means you're automatically in a depression. So what "principles" should Bernanke have applied? Who should he have saved, and who not?

Beyond that, there is another lesson, one that shows just how deep and systemic this disaster has been—far worse, in fact, than the crash that began the Great Depression or any other crisis that even the esteemed Anna Schwartz has dealt with. In capitalism, bankruptcy is supposed to be the fate of market players who make bad choices. The system gets cleaned out, the survivors deservingly pick up their failed rivals' business and get richer, and the economy comes back to life quickly. That, after all, was Andrew Mellon's infamous response after the 1929 crash. "Liquidate labor, liquidate stocks, liquidate the farmers," Herbert Hoover's Treasury secretary said—earning himself a permanent place in the annals of American villainy. But all Mellon was really doing was administering standard economic wisdom: allow the market to clear by selling. The problem was, things were probably too far gone for that to happen without a very painful depression.

Similarly, today the government is keeping failing banks artificially afloat. Interestingly, this policy has angered critics on the left, like economists Joseph Stiglitz and Paul Krugman, as much as critics on the right like Schwartz. They want the Obama team and Bernanke to be tougher on the banks. But here is the kind of thing Bernanke might say, if he were to respond: so out of control was Wall Street in recent years, and so unbalanced were global capital flows, that almost every major global bank grew weighed down with toxic assets (a few, like Goldman Sachs, handled things better than others). The system came so horribly unglued, in other words, that there was no longer any way to allow capitalist forces to restore the system to health—without a massive failure of banking and therefore another depression. So what exactly should Bernanke have done? Yes, there is a case to be made that the Obama administration and Bernanke's Fed could have taken over a couple of banks at the outset, broken up or restructured pathological monstrosities like Citigroup. But there was very little time to develop "principles" for a crisis the likes of which no one had ever seen before.

The evidence is precisely the omnipresence of those toxic assets, and the inability of both a Republican and a Democratic administration to figure out how to dispose of them.

All of which suggests that it may be time for modern economics, created around the Great Depression, to reinvent itself. New ideas are needed. It's a debate that Ben Bernanke would no doubt love to have with Milton Friedman, were the great man still around.

[one...two...tree 2,762]

I get it, mainstream is code for people you agree with. By that definition you are right, there are no "mainstream" economists that think FDR made things worse.

Libertarians are not mainstream. Their political ideology is about as far out there as Communism.

[JohnSmith2007 353]

Libertarians are not mainstream. Their political ideology is about as far out there as Communism.

That is your opinion. To me you are ultra far left in your views and no where near the mainstream.

[luckytxn 2,264]

I happen to think that some Fed intrusion is good but the Feds usually get it wrong and once they do it hard to get them to change course as this is a two party system here and they each have their own hands in the pockets. You don't spend yourself out of a recession or depression.

[Peikko 1,575]

Sorry. Don't believe in "compassionate conservatism". I am a social Darwinist. If you can't make it on your own, so sorry, you die. Survival of the fittest, and all that. Why is it that Progressives want to teach Evolution in the classroom, but don't want to see it practiced in real life?

Social Darwinism? First, Darwinism has nothing whatsoever to do with survival of the richest. Darwin proposed a scientific explanation for the observable variations not only within species, but between species that led to the evolution of one species into new species. Without understanding the science that drives genetic mutation, he realized that random mutations allowed species to adapt to different environmental conditions. A remarkable achievement and something that obviously needs to be taught in American schools, and taught in such a way that more children understand, because clearly most leave school not having a clue what survival of the fittest actually means.

As to the notion that human beings are served best as a species by allowing those who do not have access to money simply to die, that is as far from survival of the fittest as one can possibly get, because what that does is ensure that those who benefit from external forces that can and do compensate for a lack of fitness to survive in Darwinian terms are allowed to survive at the expense of those who may be, in the Darwinian sense far more fit. Not only is that useless from a Darwinian point of view, it is alien to the social makeup of mentally well adjusted humans, because our survival and success as a species is based on mutual co-operation, not the strength of individuals working in isolation and praying on the weak and infirm.

Yes, this idea that 'social Darwinism' can be justified in any way is quite disgusting, let alone that it should be taught as some kind of legitimate science.

[I AM NOT THAT GUY 5,715]

you are also a single payer advocate for healthcare.

reconcile that for us?

Government broke it. Government can fix it.