The Contraction Starts
By 1929 in the United States businesses faced new problems getting loans because the money supply was shrinking. Tariffs were going up and decreasing trade. The same was happening around the world. In essence, business was shutting down, markets were contracting, the economies of the world were starting to collapse, and business investment was falling precipitously. Somehow, this economic earthquake remained silent until October 25, 1929.
In October of 1929, all illusions came to an abrupt end. The US Stock Market crashed. Billions were lost on the New York Stock Exchange in just one day. Industrial stocks peaked at a high of 452 in 1929, but by 1932 industrial stocks were at 58. By 1932 in the US 23 million were out of work. The 1929 crash started a panic and millions of institutions and individuals began selling stock causing a continuing and precipitous market decline. Many paper millionaires, because of their extensive stock holdings, found themselves paupers within a few days. Some large banks failed because they held substantial stock investments. The panic spread to the middle class who owned few stocks but kept savings accounts in local banks. A bank does not keep enough money on hand to pay all its depositors their money at the same time. Banks loan out the deposited money, retaining only a small amount in demand deposits to pay the few customers coming into the bank on a normal day wanting cash. Because of the stock market crash thousands of depositors descended on banks demanding their money. The banks could not pay; consequently, banks began to fail by the hundreds all over the nation. When the local banks failed they took the depositor’s money with them into default causing people all over the United States to lose their life’s savings. As a result, fewer people put money into banks resulting in more money going out of circulation (and under mattresses) further decreasing the money supply and making money harder to obtain. As fear of the economic future took hold fewer people purchased items not absolutely needed, the business community suffered a greater slowdown, and more people experienced layoffs. Therefore, the descending economic spiral began and would not stop.
The economic crash became worldwide. American loans to Europe, previously easily extended, were now called. The American banks needed that money, but the European nations could not pay. The chaos in the world economy caused even more trouble, and as manufacturing declined more people were laid off, and with more layoffs fewer goods were bought (people without work stop buying) causing more layoffs. Things began to look very bleak. This was a downward spiral that fed on itself. Stopping this cycle became the major focus of economists all over the planet, but classical economic theories of the 1920s seemed unable to explain it. Unfortunately, governments were already trying to “solve” the crisis.
Hoover and Roosevelt—The Twins of Economic Failure
Governments around the world responded poorly to the crisis. In America, President Herbert Hoover began lobbying businesses to maintain high wages. He was certain if wages remained high people would keep buying, the national economy would right itself, and things would be fine. As the downward trend continued Hoover instituted government work programs and raised taxes to pay for them. President Hoover tried many things to overcome the Depression that no president before him dared attempt. In fact, his intervention into the economic system was unmatched until his successor took office. When Hoover lost the presidency to Franklin D. Roosevelt the new administration went far beyond what Hoover tried, but the focus of the effort was fundamentally the same. Under Roosevelt the Congress instituted massive work programs, tried to control wages and prices, tried to prop up farm-produce prices, supported union organization of labor in large industries, and raised taxes far more than Hoover’s administration to support new and larger government programs. Roosevelt created regulatory programs stifling competition in an attempt to raise prices because competition kept them down. The National Recovery Act, a centerpiece of Roosevelt’s economic plan, created business cartels with fixed prices and criminal prosecution for anyone trying to undercut the set price. The US Supreme Court ruled the act unconstitutional. An enraged Roosevelt moved to “pack” the Supreme Court with additional justices favoring his programs.[200] The Court converted under this pressure, approving New Deal legislation even if it breached Constitutional standards.
Roosevelt fought to end the Depression and tried everything his economic advisors—mostly university professors—could think up. Experimentation with everything became acceptable because of the national emergency. If a program failed they would try something else, but everything they tried involved deep government interference with the capitalist market economy. Most of the interference came under the philosophic heading of corporatism, or tripartite control. Corporatism means government combined with big business to create cartel like situations limiting competition and imposing price controls. Under a typical tripartite scheme government, big business, and big unions join together to decide production levels, wages, prices, and regulatory oversight routines. With both corporatism and tripartite concepts the government has the ultimate say so, and it can enforce the decisions of the group with government power. These concepts were implemented in the Great Depression, WWI and WWII, although less effectively in the US than in the nations of Europe. Both ideas, like socialism, destroy the free market.
Strangely, if Hoover and Roosevelt had done nothing the Depression in the United States may have ended in a year to perhaps three years. Today there is little doubt that government interference with the market economy prolonged and deepened the Great Depression.[201] Sharp downturns occurred in previous years under various presidents, but the government sat still allowing the recessions to run their course. Usually, they cut taxes and just rode out the problem for a few months. From 1854 to 1919, the average downturn was over in 17 to 24 months (see stlouisfed.org). From 1873 to 1879 a severe panic hit the nation; however, the government allowed the economy to punish marginal businesses, and the recovery, although delayed, was very robust. In 1920 through 1921 another panic hit and unemployment reached a high of 11.7 percent, but the government, under President Coolidge and Treasury Secretary Mellon, remained aloof and the adjustment was swift. Unemployment fell to 2.4 percent in 1923. After World War I bigger government was the rule, and some intellectuals (university professors) thought the government could solve the economic hardships, overturn the rules of classical economics, and build a bright tomorrow. They were very wrong. Nearly everything the government did under Hoover and Roosevelt was wrongheaded and backfired in ways beyond imagination. Huge voting majorities continued to back Roosevelt and the Democrats because they were “doing something” about the Depression. Roosevelt’s propaganda was excellent, and the public failed to understand the harm done by its well-meaning, but economically ignorant, government leaders.
By the mid to late1920s America increased production by 24 percent and real income grew by 2.1 percent; that is real prosperity. The next ten years stood in stark contrast to the prosperous 1920s. Even after the 1930s and 1940s America’s problems continued, and the nation’s return to true prosperity occurred in the 1950s.[202]
A few statistics should help focus the issue:
1929 Unemployment 3.3%
1930 " 8.9
1933 " 24.9 (Roosevelt takes office in March)
1935 Unemployment 20.1%
1937 " 14.3
1938 " 19.0 (5 years in office)
1941 " 9.9 (8 years in office)[203]
Clearly, the chart shows FDR’s New Deal did not solve America’s economic problems until after 1941.
By interfering with the economy, the government destroyed the economy’s ability to adjust. Wages, for example, must be allowed to fall along with prices in economic downturns (classical economics—see Economic Theory below). This allows businesses to maintain their employment levels even though their goods are selling for less, otherwise (if wages stay artificially high) employers must lay off employees as earnings fall. The result of Hoover’s high wage policies was more jobless people. Raising taxes took money away
from consumers who would normally spend the funds for goods, and businesses who could have maintained higher employment levels. The drop in consumer spending, in part because of high taxes, severely affected the business community. High taxes rob funds from private enterprise normally used to create jobs and additional goods. Lowering taxes during economic downturns increases funds available for consumers and businesses. Raising taxes as Hoover and Roosevelt did was the worst possible economic move.
Roosevelt’s interventionist policies created substantial monetary, regulatory, and economic chaos. This led to increasing uncertainty in the business world and accordingly prolonged and deepened the depression. No one knew what was coming next, and new programs constantly came out of Washington that reduced profits and destroyed business flexibility. All these programs imposed massive additional administrative and legal requirements on business; consequently, predicting the future business environment became impossible. Those borrowing or investing large amounts of money need reliable business projections. If tomorrow brings more chaos, higher taxes, fewer markets, more regulation, and the like businesses cannot make reliable projections and avoid investing money or otherwise accepting risks. Fear of unexpected government moves can shut down business as effectively as enormous taxes.[204] As a result, private investment in industry fell to zero percent (that’s right—0%) through most of the depression, and in 1938 it was actually 800 billion less than zero. Investment from private sources went very negative after the crash.[205]
Liberal economist and politicians roundly reject the classical economic theories supported above. They endorse Keynesian economics or outright socialism. (See: FDR’s Folly, Powell, Jim, 2003, Three Rivers Press). Under their analysis of the Great Depression Hoover failed because he refused to do enough, but Roosevelt’s programs succeeded; however, they also contend Roosevelt’s success was tempered by a lack of spending. Keynesians argue that if Roosevelt had spent much more much sooner, like the government did in WWII, the Depression would have ended in two or three years (by 1936).
At least one factor going unanalyzed in the Great Depression is the impact of the great 1919 influenza pandemic. Falling populations can cause economic downturns, and the deaths of 100 million people worldwide could have contributed to the Great Depression. Over 500,000 may have died in the United States, 250,000 in Britain, 400,000 in France, and over 17 million in India. This all took place between 1918 and 1920, and the Great Depression arrived in 1929; thus, most will automatically believe there was no correlation. Still, the deaths of 100 million people (probably 5 percent of the world’s population) should have an economic impact. I know of no studies on this issue.
Economic Theories
There are at least six major economic theories floating around, and each made a difference in how governments approached the crisis.[206] Here is a quick survey of the basic positions:
1. Capitalism: is a system of private ownership of property, including the means of production, coupled with a small amount of government intervention in the economy. Capitalism does not aim for social justice. Unlike other economic ideas, capitalism’s aim has nothing to do with concepts of justice or equality. Capitalism recognizes human selfishness and claims it is good when harnessed correctly. It is a classless theory, where people make money by competing and not by government action. Economic control is by private market competition, where individuals or corporations compete against others to bring goods and services to the market desired by private citizens (they hope). This is a decentralized economic system where central planning is minimal. The markets are thought to regulate themselves. Regulation of business is the key form of government control under capitalism, but this regulation is to insure a “level playing field” and to protect the public against crime, but little else. This system was in use in America since its inception as a nation and was only de-railed by the Great Depression and the New Deal era. During the Great Depression, the USA passed many laws governing the economic life of the nation, but left the basic concepts of capitalism in place. In modern capitalist societies “welfare capitalism” has evolved, wherein the government provides safety nets for people who are out of work or otherwise unable to support themselves. Prior to the Great Depression the USA was, for decades, the world’s fastest growing and strongest economy.
2. Socialism: is a system of government ownership of most businesses and central planning of the economy. It is also a system of social justice. Under socialist thinking, equal property distribution is justice which will uplift the lower classes and bring universal peace accompanied by the reconciliation of all peoples (no joke). In this summary we will only deal with the economics of socialism. Socialist think the community as a whole should own the means of production; however, as applied in Europe in the 1930s, it generally meant the government nominally controlled the largest businesses but required very high taxes and the redistribution of wealth through social welfare programs. Governments embracing socialism guarantee free or low cost medical care, housing, food and other essentials to the populous. England, France, and other European economies began turning to socialism after World War I. Modern socialism continues to stress the importance of full employment, generous benefits to laborers, and high taxes to support the educational, medical, and welfare aspects of society. Central planning forces the production of products the government deems desirable, or prevents the manufacture of products deemed undesirable. This utopian dream of universal peace is yet to be achieved.
3. Marxism: was developed by Karl Marx and Friedrich Engels. Its aims include the liberation of workers from exploitation, coercion, and misery. The theory opines societies’ fundamental elements are determined by their methods of production. The method of production eventually decides the property relationships of society, and these property relationships determine everything else—including religion, politics, and classes of persons in that society, et al. In modern capitalist societies of the late 1800s, Marx and Engels believed history was reaching its climactic moment, as these societies would soon succumb to violent overthrow by the working classes. The proletariat (working classes) would establish the final society—one without classes—where each person worked and gave to others freely as their needs dictated. In this final classless society, ownership does not exist. Marx and Engels theorized the proletariat revolution was inevitable. This theory of an ultimate unavoidable utopian society eventually developed into Soviet style communism unlike anything envisioned by Marx. No nation has installed a utopian Marxist government, and no society ever managed anything like the utopia Marx and Engels imagined.
4. Communism: is a philosophy flowing from Marxism requiring the vesting of all property and authority in the community at large (the state). Its aims are justice, freedom, and humanity. In pure Marxism, each gave according to his ability, while the wealth of society was given according to ones needs, and without intervention by state authority (it did not exist); however, all communist states allow government acquisition of all property and all authority (power), making the state all powerful. This results in an autocratic centrally planned society. The government controls all aspects of life (for the good of all—of course). Prior to Stalin, the political bureau of the communist party was the sole determiner of the “will of the people” according to the Constitution of the USSR. In the Stalinist USSR of the 1930s and to Stalin’s death in the 1950s, only Stalin determined the will of the people in spite of the USSR’s Constitution (what document ever stopped a murderer?). After Stalin, the Soviet leaders partially melted into the political bureau for collectivist decision making, but the real and final power always rested with the leader of the party. As an economic system it has failed many tests, including the Soviet Union, Red China, and North Korea.
5. Mercantilism: an economic theory developed in the 1600s stressing the importance of international trade to acquire gold or silver; hence, shoring up a nation’s currency and economy. The ideal economy required importing raw materials at low prices and exporting
finished goods at high prices, thereby attracting money (read, precious metals) into that nation’s economy. By maintaining a favorable balance of trade (exporting far more than importing), a nation would remain economically strong. Huge theoretical problems surfaced in the 1750s, because the Mercantilist theory assumed a fixed amount of trade; thus, attaining more trade for your nation required taking it from others. Later economists argued the size and strength of a nation’s economy determined its “wealth” not the amount of gold in its vaults. Economists also determined the amount of international trade was not fixed; thus, killing mercantilism as a theory. However, the reader should note that many nations in 2010 still operate on a quasi mercantilist theory by stressing the development of heavy industry, and adopting policies that make exports more important than imports (in the 1930s many nations were doing the same). Japan and China are the key modern examples—although they would deny using this theory. Both China and Japan stress the development of heavy manufacturing for export, and the import of low cost raw materials for manufacturing purposes.
6. Fascism: is a political philosophy requiring individuals be subservient to the state, and controlling the state was a strong leader executing the desires of the people (Stalin took a shortcut, he just executed the people). Social justice is feigned by fascists, but it is not a central concern. It is highly nationalistic and glorifies war. This becomes an economic philosophy because heavy industry is subject to state control, and getting everyone to work is a major goal of this political ideology. The Fascist would not care about a bicycle shop, but they became very concerned about what the nation’s major industries were producing, and they would order the major industries to produce what was good for the expansionist Fascist state. Under the Italian form of fascism industries were organized by type, and a committee of government and industrial bosses ran each economic sector through these committees—although the government had the ultimate say. Modern corporatism is said to be a form of fascism. Germany was the premier Fascist state in the 1930s; however, Benito Mussolini had introduced fascism into Italy years before Hitler initiated it in Germany. It totally failed as an economic and political philosophy; however, it is not dead. Many nations actually practice fascism while calling it something else. Cuba under Castro is an example of a fascist state calling itself communist.
The Super Summary of World History Page 36