Tag Archives: Great Depression

The Hundred Days.

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            Elected as President in November 1932, Franklin D. Roosevelt (FDR) took the oath of office on 4 March 1933.  His inaugural address mixed optimism with slashing attacks on those whom he blamed for the country’s problems.  He would seek “broad Executive powers to wage war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.” 

            Good for his word, FDR launched an astonishingly fast transformation of the government and its policies.  This first sprint became known as “the Hundred Days.”  He ordered banks closed to halt panics; called Congress into a special session beginning on 8 March 1933; sent Congress new banking laws that were passed and returned to FDR for his signature in less than a day; sent Congress a bill to reduce government spending, including cuts to the pensions of military veterans; and sent Congress a bill to begin repealing Prohibition. 

            FDR began the regulation of the markets for stocks and bonds with the Securities Act of [May] 1933.  In 1935, it was followed up in the Creation of the Securities and Exchange Commission (SEC) to make sure banks complied.  The Banking Act of 1933 (commonly called the Glass-Steagall Act) required the separation of commercial and investment banking. 

            Early on, FDR adopted a policy of promoting inflation, chiefly with the aim of reducing the burden of debt on borrowers.  On 18 April, he issued an Executive Oder regulating the outflow of gold from the United States; shortly thereafter Congress passed a resolution abolishing the anti-inflationary “gold clauses” in public and private contracts.  In July, he told the American representatives to an international economic conference to refuse to “peg” the dollar to any fixed exchange rate.  In November, FDR would order government purchases of gold to pump paper currency into the economy.  By January 1934, the currency had been devalued by 40 percent.  Thereafter, the Gold Act of 1934 empowered the Treasury to manage both domestic credit and the international value of the dollar. 

            He then turned to revolutionizing basic government policies on the economy.  He had been persuaded of the merits of central planning of the economy.  On 16 March 1933, FDR sent Congress a bill to create an Agricultural Adjustment Administration (AAA) that would restrict the massive production that had created a glut on the market.  The AAA would limit farm production in order to raise the price of key staple crops—and therefore the income of farmers.  The markets were drowning in corn, wheat, cotton, and hogs.  Production would be cut back.  The Agricultural Adjustment Act passed Congress on 12 May. 

            At the same time, FDR pushed for a National Industrial Recovery Act (NIRA).  As in agricultural policy, the bill broke with the traditional reverence for the “free market” and “laissez-faire.”  The Act encouraged business sectors to organize markets, production, and prices to stop over-production and stabilize prices.  To these measures was added a Public Works Administration to put the unemployed back to work until business revived.  Mixed in with the NIRA’s planning element were other long-sought reform goals: shorter working hours, higher pay, the right to unionize, an end to child labor.  The NIRA passed on 16 June. 

            There was much else.  TVA; CCC; FDIC; “relief,” later with a work requirement added.    The point is that FDR moved fast and broke with all sorts of precedent.  People saw him acting with energy and confidence, even if no one knew if it would work.  It was worth a shot. 

The Depression.

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            By late 1929 the American economy had reached the saturation point in its ability to consume new goods.  The number of new cars registered began to fall sharply and new houses being constructed fell off as well.  These were warning signs of an economic slowdown.  As the American economy slowed, the Stock Market began to fall.  The fall of the Stock Market was more a symptom than a cause of the problem.  From 1929 to 1931 the American economy went into a deep spiral.  Demand for goods fell off, producers cut back on the number of workers and on the amount of raw materials.  The unemployed suddenly spent less and farmers and miners saw their incomes shrink even further, so they spent less.  Falling spending by ordinary consumers then drove down demand even further, setting off a new turn of the spiral.  People who couldn’t pay back the loans they had contracted in happier times lost their homes or farms or businesses.  Banks collected farms and houses and businesses they couldn’t then resell. The banks themselves went bankrupt too.  Most countries had little or no unemployment insurance.  If you lost your job, you had to get another one or starve.  There weren’t any jobs to be found.  People got desperate.  They demanded government action, or they moved elsewhere in search of work, or they tried to organize protest movements and political movements.  All existing institutions were called into question. 

            This crisis quickly spread to the rest of the world.  Americans stopped importing, but insisted on collecting the loans they were owed by other countries.  These countries first tightened up their own economies to try to pay back the loans, then defaulted on the loans rather than drive themselves into complete collapse.  Countries went off the existing system of international payments.[1]  This caused international trade to decline sharply, throwing more people out of work.  Nobody but the Soviet Union—a non-capitalist country that traded very little with the rest of the world—managed to ride out this crisis without suffering economic hard times.[2]  In many places, people concluded that the government would have to accept responsibility for insuring prosperity in the future, as well as peace and security.[3] 

            Many people questioned the systems of capitalism and representative government.  All they seemed to offer was the “freedom to starve.”  Democracy failed in Germany and Adolf Hitler came to power.  It teetered on the edge of collapse in France.  In the United States, Franklin D. Roosevelt became president and launched a program called the “New Deal.”

This constituted a decisive moment in the development of modern governments.  The historian John Garraghty has written an interesting book comparing the response to the Depression of the American “New Deal” and Nazi Germany.  One would expect that they were very different from one another.  Wrong: there were a lot of similarities.  The main difference was that Nazi Germany was more effective at putting people back to work.  The both increased government control of the economy.  They both spent a lot of money to put the unemployed back to work.  One thing that people discovered, during the Depression and later in the Second World War, was that deficit spending offered the best way out of the slump.  We’re still living with the consequences of that discovery. 

[1] The Gold Standard. 

[2] Well, more accurately, it didn’t suffer hardships as a result of the Depression.  Stalin’s drive for rapid industrialization inflicted severe hardship on almost all Russians. 

[3] If you look at the—so far—failed efforts to repeal and replace the Affordable Care Act/Obamacare, you can see that Americans have now concluded that it is the duty of the government to insure health care at a low cost to consumers. 

A couple of economic ideas from the past.

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As we lament economic inequality and get ready to keel-haul the Greeks, it is worth recalling  some commanding ideas of the past.

International payments and the domestic economy.

First, in the olden days, money had consisted of silver (good) and gold (better). Then, people had agreed to use paper money (which was worthless) on the understanding that it could be exchanged for gold whenever anyone wanted. To prevent scummy governments from printing all the paper money they wanted (“How can I be over-drawn when I still have some checks?”), fixed ratios of paper money to gold held by the government were established. The more gold that a government held, the more paper money that it could issue; the less gold that a government held, the less paper money it could issue. (See: accordion.)

Second, the money from one country can’t be used in another country. Countries settled their debts by transferring gold. Buy more stuff from a foreign country than you sell to that country and you had to settle the debt by shipping gold. Sell more stuff to a foreign country than you buy from it and they sent you some gold.

Third, if you put gold-backed paper currency together with the use of gold to settle international debts, you got a system in which the domestic economy of each country was linked to the international economy of all countries. If a country exported more than it imported, then gold flowed into the country. The increased gold supply inside the country compelled that country to increase the amount of paper currency in circulation. Prices and incomes would rise, making it less competitive. If a country imported more than it exported, then gold flowed out of the country. The decreased gold supply inside the country compelled that country to decrease the amount of paper currency in circulation. Prices and incomes would fall, making it more competitive.

Ideally, each country would strive for a rough equilibrium. However, the system was thought to be kinda-sorta automatically self-correcting. Countries with in-flows of gold and rising national incomes then could afford more stuff from abroad and ended up having to export gold. Countries with outflows of gold and falling incomes then could afford less stuff from abroad and ended up importing gold. This cut down on the role of any national government in managing the economy. Mostly, the heads of the various national banks (the Bank of England, the Bank of France, the US Federal Reserve Bank, etc.) were supposed to co-operate in smoothing out any bumpy patches.

 

Business cycle theory.

Commonly-accepted economic theory held that during a period of growth demand exceeded supply, so prices rose too high; any fool could make a profit and many did; wages tended to float up above a sensible level and many dead-beats got hired; and banks made unsound loans. In short, “plaque” built up in the “arteries” of the economy. This couldn’t go on. Eventually a “slump” would clean out all the plaque and re-establish the basis for sound growth. (See: angioplasty.) Demand would fall. Falling demand would force down prices to a reasonable level; unemployment would get rid of dead-beats and take wages down to a sensible level; silly businesses (see: nail salons) would go bankrupt; stupid loans would not be made; and the particular mix of products would return to what people actually needed. Then the economy could start growing again.

There is a seductive elegance to these all-encompassing theoretical systems. Same as there is with Marxism. The parallels don’t end there. Ideas have consequences.

Keynesianism and Monetarism

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Accepted truth from 1776 to 1929: the “invisible hand” of the unrestricted free market is the best regulator of the economy.  The economy expands, contracts, expands in natural cycles.  Government should stay out of the way, balance its budget (no deficits), and keep taxes low.  This is called “laissez faire” (pronounced lay-zay fare).  These ideas are most associated with the British economist Adam Smith who wrote a book called The Wealth of Nations (1776).

Then came the Great Depression from 1929 to various points in the Thirties.  Thousands of bank failures, tens of thousands of bankrupt businesses, millions of unemployed people, and year after year of hardship with no hope in sight.  The “invisible hand” seemed too invisible for most people’s liking.

Accepted truth from 1933 to 1973: Recession (bad) and Depression (worse) result from a shortfall in Demand (people wanting to buy stuff) compared with what the economy can actually produce.  Government should make up the difference by spending money to buy stuff.  Also, if a government ran a budget deficit in the process of reviving the economy, it was all right and not the end of the world.  So, the government could manage the economy, do lots of things for citizens, and let the politicians decide how much to spend on what.  These ideas are most associated with the British economist John Maynard Keynes (pronounced Kanes) who wrote a book called The General Theory of Employment, Interest, and Money (1936).  So this is called “Keynesianism.”  By the mid-Sixties everybody was a “Keynesian.”

Then came the Seventies.  The “oil shocks” of 1973 and 1979 caused world-wide “stagflation”: a combination of high inflation and high unemployment.  In economic theory, this could not happen.  In economic reality, it could happen.  People observed that big government deficits dumped gasoline on the fire of inflation, while lots of government control of the economy blocked adapting to new conditions.

Accepted truth from 1973 to 2008: the money supply and interest rates really govern the economy.  Deficits are bad because they either dump excess money into the economy (fueling inflation) or “crowd out” businesses that want to borrow money (smothering economic progress like a wicked step-mother).  The government should balance budgets, cut spending, cut taxes, keep interest rates low, and let the natural economy function.  These ideas are most associated with the American economist Milton Friedman who wrote a book called The Monetary History of the United States, 1867-1960 (1971). So this is called “Monetarism” (rather than “Friedmanism”).

Then came the “Great Recession” of 2008-201_ (fill in blank when you get a job).  Unregulated bankers did a lot of, you know, silly things.  The world financial system almost collapsed.  We’ve got seven percent unemployment.  Monetary policy isn’t working: the interest rate is at about zero, but the banks still aren’t lending; my 401(k) is only now back to where it was in 2008.  So, what is to be done?  Ask Keynes.