The post war
period was an era of great prosperity generally
referred to as the roaring twenties. US
President Coolige was an advocate of "small government" and his supply side
economics proved a real success story. Under his
presidency, the top
marginal tax rates were gradually reducedfrom 73% in 1922
to 24% in 1929. These "Mellon
tax cuts" restored the incentives to work, save and invest and generated
an atmosphere of great dynamism. The reduction of
top tax rates particularly motivated the entrepreneurs to
engage in
the risky business of innovation with an unprecedented series of great
discoveries and inventions as the logical
consequence. Electrification,
radio, phonograph and telephone date from this
era and brought a wide
range of new
machinery and consumer goods.
New tools and
processes (Ford's assembly line) drastically increased productivity. All these brand
new
technologies boosted productivity and prosperity all over the
world.
In the Soviet Union, the communist
experiment was still young and initially looked
like a success story. Many considered the economic model organised by
central
planners as a modern and rational alternative for the "irrational
anarchy" of free markets. In Europe as well as in the U.S., the
economic dispute between the socialist - interventionist ideas of J.M Keynes' and the classic liberal ideas of the "Austrian school"
of Von Mises
and Hayek
was at the centre of the political debate.
Easy access to
cheap credit By the end of
the
decade the economic boom culminated in a general euphoria, particularly
in the U.S. Asset
prices
skyrocketed. Prior to the
euphoria a long period of easy access to cheap credit had caused the money supply to grow
at a much faster pace than the
real
economy. From 1921 to 1929 the US money
supply increased by 61 percent. In Europe the fast money supply
was exacerbated
by the massive German compensations for war
damages. English repayment of war loans inflated the
US money supply even further. As a consequence
inflationary
pressures increasingly built up in Europe as well as in de
U.S. Between 1928 and
1929, the easy access to cheap
credit caused reckless speculation on stock markets and on assets in
general. Prices gradually inflated to an unsustainable asset
bubble. In the 30
months from March 1926
to September 1929 the Dow Jones
rose 230% from 166 to 381. A correction had
become inevitable, but turned into
a severe crash due
to calamitous
government intervention. Political Blunders Hoping to
control the speculation, the political
authorities and inexperienced Federal Reserve
(°1913) took some most unfortunate anticyclic measures. Today Most
economists consider these
as overdone. For
free market economists the interventions
were superfluous
absurdities.
In an effort to
control speculation, US government first banned
bank
loans for margin trades. Moreover the FED
drastically raised its discount rate from 3.5% (Jan 1928) to 6% (Aug
1929). It caused an unexpectedly contraction of the money supply by a
massive one third in the six months
from August '29 till
March '30. Markets
reacted most vigorously. Stocks plummeted
and asset prices crashed, causing a dramatic contraction of the real
economy.
In an effort to
remedy the
accelerating recession the US
Government then relied on protectionism. In
the Smoot-Hawley act of 1930, the US raised import
duties on 25.000 articles to an average rate of 65%. The American
protectionism caused reprisal
protective measures by most trading
partners. The
trade war that followed just killed international trade, with
devastating effects on productivity and boosting unemployment to
unprecedented levels.
Facing
budget deficits as a result of declining revenues and increasing
welfare
demands President Hoover then decided to double
income taxes. The 1932 Revenue act increased
top
tax rates from 25% to 63%. President Roosevelt later increased these
rates even further to 79% and at one point
even proposed a top
tax rate of 99.5%. Moreover
drastic
reduction of most tax exemptions did particularly hurt middle income
groups.
The 1932 landslide
election victory of the democrats had sparked a true panic
among savers. About three weeks before
Roosevelt's inauguration, alarmed
customers rushed to their banks to empty their accounts. These bank
runs ruined numerous banks. On the day before Roosevelt took office,
more
than 5000 banks went under.
In an effort to
halt the panic, Roosevelt two
days after his inauguration declared a "bank
holiday". For four days
the nation's banks were closed and all
financial transactions were halted. In the meantime the new president
pushed
the
Emergency Banking Act through the legislative chain.
Roosevelt's Radio announcement of the bank holiday Policy Unpredictability
created a
climate of fear. Passed by
Congress
on March 9 1933, the Emergency
Banking Act handed the
president a far-reaching grip over
bank dealings and foreign transactions. The act also
allowed Roosevelt to seize
peoples gold
holdings, and devalue the dollar with 40%. The American devaluation
set in motion a
downward spiral of competitive depreciations by
the trade partners
all over the
world, ruining the world trade and American exports even further.
Only two months later the
Agricultural Adjustment Act (AAA) was passed. In an effort to
stabilise the depressed farming market and support food prices the act
encouraged farmers to grow fewer crops and to destroy crops and cattle.
As the crisis
deepened ever further, panic spread to
the political leaders. In an ever faster pace they declared new
emergency
measures.
The
rapid succession and unpredictability of government interventions
created a climate of legal uncertainty and deteriorated the
poor business
climate even further. Rapidly
changing
tax rates and subsidy regimes,
regulations of wages, prices, interests and production were all
government interventions on a scale the world had not known till then.
The interventions created
a general sence of uncertainty and fear.
Faced with so much incalculable risk most industrialists decided
to postpone
investments till things had settled.
New Deal, bad Deal, with devastating
Social Damage It was in deed
not
free market failure which produced the 1929 depression. It was
interventionism and political bungling on a grand scale,
with the one policy
blunder succeeding the
other: trade crushing
tariffs, incentive-sapping
taxes,
mind-numbing controls on production
and competition, senseless destruction of
crops, coercive labor laws and not in the least the FED's
mismanagement of the money supply. The social cost
of the political blunders was the
severest crisis in history. Stocks
fell to 10% of their pre-crash value, income
fell by 28%, car
sales fell by 75%, banks
failed in record
numbers, dragging down hundreds of thousands of customers. 13
million
unemployed in the US causing poverty and rumors of revolt.
Government
intervention only deepended the crisis
Conclusion
The
specialists on the matter Murray Rothbard, Laurence Reed, Amity Shlaes
unanimously agree: the
great depression was not a crisis of
capitalism but merely a crisis of interventionism. Politicians
completely mishandled a mild recession. It was not market
failure but the combined mistakes of Central Banks
and Central Government. Irrational fear for deflation led them to
distort the healing price mechanism. They prevented prices and wages
from falling, hindering markets from adjusting to the new situation and
finding a new
equilibrium. The interventions caused such distortions
that they lead to massive
misallocation of scarce resources ultimately turning the
natural
slowdown of the business cycle into the deep depression.
Politicians
and the FED would much better have left markets to
themselves. The
price mechanism
guided by the collective
wisdom of millions of
individuals such as expressed in billions of free economic choices
would have lead marketsto a new equilibrium and stable
prices in just a few
quarters. In his
analysis "Great
Myths of the Great Depression", Lawrence
Reed convincingly
demonstrates that
Roosevelt's
deficit spending did not boost demand at all. The massive resourses
spent in low
productive public investments was
merely outcrowding productive business investment as well
as private consumption.
In
this way Roosevelt's
Keynesian remedies of the socialist-style New Deal and the and excessive
(near fascist) dirgism in the National
Recovery Act (NRA)rather than
remedying
the 1929 crisis, prolonged it well into the
40's.
Paul Vreymans
Audio
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Depression Click
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(1) $ billions (Historical Statistics, Fl)
(2) $ billions,
1929 prices (Historical Statistics, F3)
(3) 1947-49=100
(Historical Statistics, El 13)
(4) $ millions,
June figure (Friedman and Schwartz, 1963, Appendix Al)
(5) $ millions,
June figure (Friedman and Schwartz, 1963, Appendix Al)
(6) suspended banks
(Board ofGovernors, 1943, p. 283)
(7) deposits
insuspended banks (Board ofGovernors, 1943, p. 283)
(8) yearly average
yield on 3-6 month Treasury notes and certificates (1919-33) and bills
(1934-41)
(Board ofGovernors,
1943, p. 460)
(9)
short-term Government yield less CPI inflation rate insame year
%change refers to year-to-year differences in the logs of the series to
the left
Since it first appeared in 1963, it
has been the definitive treatment of the causes of the depression. The
book remains canonical today because the debate is still very alive.
Rothbard opens with a theoretical treatment of business cycle theory,
showing how an expansive monetary policy generates imbalances between
investment and consumption. He proceeds to examine the Fed's policies
of the 1920s, demonstrating that it was quite inflationary even if the
effects did not show up in the price of goods and services. He showed
that the stock market correction was merely one symptom of the
investment boom that led inevitably to a bust. The Great Depression was not a
crisis for capitalism but merely an
example of the downturn part of the business cycle, which in turn was
generated by government intervention in the economy. Had the book
appeared in the 1940s, it might have spared the world much grief. Even
so, its appearance in 1963 meant that free-market advocates had their
first full-scale treatment of this crucial subject. The damage to the
intellectual world inflicted by Keynesian- and socialist-style
treatments would be limited from that day forward.
Eric Rauchway of
the University of California at Davis and the author of The Great
Depression and the New Deal: A Very Short Introduction, talks
with EconTalk host Russ Roberts
about the 1920s and the lead-up to the Great Depression, Hoover's
policies, and the New Deal. They discuss which policies remained
after the recovery and what we might learn today from the policies of
the past.
No economic myth
these days is more pernicious than the myth that the free market caused
the Great Depression and the New Deal got us out of it. That, as
economist Robert P. Murphy points out is flat-out false. In The
Politically Incorrect Guide to the Great Depression and the New Deal he
provides irrefutable evidence that not only did government interference
with the market cause the Great Depression (and our current economic
collapse), but Herbert Hoover’s and Franklin Delano Roosevelt’s big
government policies afterwards made it much longer and much worse (just
as President Barack Obama’s extraordinary expansion of government
promises to do today). Perhaps even more compelling, Murphy exposes the
untold story behind the New Deal—how it operated by force, and why
what’s really at stake is not only our economy but our liberty. The
real “lessons of the Great Depression” are not what you’ve been taught.
Robert Higgs, of the
Independent Institute, talks with EconTalk host Russ Roberts about the
Great Depression, the New Deal, and the effect of World War II on the
American economy. Using survey results, financial data, and the pattern
of investment in the 1930s, Higgs argues that New Deal policies created
a climate of uncertainty that prolonged the Great Depression. Using
consumption data, he argues that prosperity did not return during
wartime, but rather after the war when government intervention in the
economy subsided.
Amity Shlaes,
Bloomberg columnist and visiting senior fellow at the Council on
Foreign Relations, talks about her new
book, The Forgotten Man: A
New History of the Great Depression. She and EconTalk host Russ Roberts
discuss Herbert Hoover, Franklin Delano Roosevelt, the economics of the
New Deal and the class warfare of the 1930s. Amity
Shlaes uncovers how big Government prolongued the depression till
late in the '30s, even '50s, and how we still suffer the legacy of
Roosevelt"s National Recovery Act and big
government idea's today. A great 60 minutes podcast.
This book, originally published in
1932, presents a cosmology of a mass delusion which affects the
mentality of the world. This takes place following World War I where
the Federal Reserve System, for the first time, allowed flexible
currency. This book blows away the conventional interpretations of the
crash of 1929, not only in its contents but that this book exists at
all. . He ascribes the crash to the pile of up debt, which in turn was
made possible by the Fed printing machine. This created distorations in
the production structure that cried out for correction. So what is the
answer? Let the correction happen and learn from our mistakes. Such is the thesis of the great
Garet Garrett. This book It was written
in 1931. Two years before FDR arrived with his destructive New Deal,
ascribing the depression to captialism and spectulation, Garrett had
already explained what was really behind the correction. It took
Murray Rothbard to resurrect these truths decades later, and when he
wrote this in 1963, it was a shock and we are still fighting an uphill
battle to explain the true causes of the crash and following
depression. But here in this wonderful book is an actual contemporary
account that spelled it out plainly for the world to see. No more
can we say that people back then could not have understood. Garrett
told them. And thanks to this new edition of this classic and important
work, he is telling us again today.
This
is a
frightening book. It
shows how massive consumer debt will trigger the next depression,
starting about the year 2007. Most of the logic used to support this
premise is based on the government's own published data. The exuberance
resulting from the overheated stock market of the 90s caused consumers
to stop saving and go into debt. Then, the dramatic drop in mortgage
rates enabled people to refinance their homes and go even further into
debt. People are no longer living on what they can afford; instead they
are living the lifestyle they think they deserve, costs be
damned! With interest rates
increasing, savings rates near zero, and debt at its maximum; many
people will be pushed over their debt limit, having homes foreclosed by
the banks or going into bankruptcy. Others will heed the warnings and
reduce spending, causing a dramatic slowing of the
economy.
From both an economic and monetary
perspective, the United States is a
house of cards—impressive on the outside, but a disaster waiting to
happen beneath the surface. In a relatively
short period of time, the country has gone from the world's largest
creditor to its greatest debtor; the value of the dollar has declined;
and domestic manufacturing has given way to non-exportable services.
While these and other issues could potentially spell disaster for your
financial well-being, the situation could also present unique
opportunities—if you're prepared. Now, in Crash Proof, Schiff
provides you with an insightful examination of the structural
weaknesses underlying this impending economic meltdown, and discusses
the measures you can take to protect yourself—as well as profit—during
the difficult times that lie ahead. He also outlines a specific
three-step plan that will allow you to preserve wealth and protect the
purchasing power ofthe savings you have worked a lifetime to
accumulate. Peter D. Schiff does have a survival plan that can
provide the protection that readers will need in the coming years.
Amity
Shlaes is a prominent
American author and commentator and a staunch advocate for
laissez-faire economics. Her writings offer a refreshing free-market
perspective on the issues of political economy and taxation.
She
has written
extensively for the Financial Time, Fortune, The
New Yorker, The American Spectator, Foreign Affairs, National Review,
and The New Republic,
among many others. Her many appearances on television and radio include
regular commentary on public the radio show Marketplace.
Ms.
Shlaes is the author of three books, including The Greedy Hand: How
Taxes Drive Americans Crazy and What to Do About It and The Forgotten
Man: A New History of the Great Depression, published by HarperCollins
in June 2007.
Formerly a columnist for the Financial Times and a member of the
editorial board of the Wall Street Journal, Amity Shlaes is a
syndicated columnist for Bloomberg News and a Visiting Senior Fellow at
the Council on Foreign Relations. She lives in New York City . .
Burning
Corn for Fuel
In the 30s,
prices for both livestock and cash crops dropped to rock bottom. In
1925, corn had
sold at $1.07 per bushel. By December 1932, corn
was selling
for only 13-cents and was actually cheaper than coal. So, farmers
began
burning their harvest rather than selling it.
Robert Higgs, of the
Independent Institute, talks with EconTalk host Russ Roberts about the
Great Depression, the New Deal, and the effect of World War II on the
American economy. Using survey results, financial data, and the pattern
of investment in the 1930s, Higgs argues that New Deal policies created
a climate of uncertainty that prolonged the Great Depression. Using
consumption data, he argues that prosperity did not return during
wartime, but rather after the war when government intervention in the
economy subsided.
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