The Great Depression Americas beginning slide into Socialism.
By 1929 America was once again slipping into a Recession. As we discussed in my previous essay “History-It’s all been done before” America had been experiencing a 10 year boom and bust cycle. The last mini depression was in 1920 and lasted for only a year thanks to some aggressive actions or I should say inactions by our Government. What followed was one of the best boom cycles ever known. It became known as “The Roaring Twenties”. More “Middle Class” families not only saw an increase in their personal incomes. They also gained access to “Luxuries” that only the Upper Class previously had access to. Many “lower class” Americans moved up into the “middle class” for the first time. Laissez-faire, then, was the policy dictated both by sound theory and by historical precedent.
Secretary Herbert Hoover soundly disagreed with then President Harding’s measures of non-intervention and as soon as Hoover became President in 1929 initiated his “vision” of how Government should respond to economic crisis.
What followed was an all too predictable cascading series of failures and those dastardly unintended consequences Government seems to create.
The next bust cycle began in 1929 and unlike his two previous predecessors, Hoover chose to intervene. He felt that Government spending with modest targeted tax cuts would stop the cycle we were in. He drastically increased infrastructure spending and increased regulations and taxes on businesses Hoover also became enamored with Unions. He instituted Price controls and artificially bolstered wages at the behest of the Unions. President Hoover also pushed for the expansion of credit, propping up of weak firms and subsidies to unemployment and public works. He was the first of the New Deal Presidents.
Stimulus, infrastructure/shovel ready programs, Government control of industry, propping up of failed businesses sound like today’s solutions does it not? Yes it has indeed all been done before.
1931 the beginning of the end
1931 the year that Dr. Benjamin Anderson aptly named “The Tragic Year” was the year which politicians and economists were sure would bring recovery, brought instead a far deeper crisis
and depression. Almost all had reached a consensus that President Hoover had saved the economy and thus set the stage for all future discussion on the matter. No one would simply stand up and say “it’s not working.” As a result further delving into the control of the Free Market was assured.
Part of our downfall was the instability in Europe. Europe was hit hard partly in reaction to its own previous inflation, partly from inflation induced by our foreign loans and Federal Reserve
“encouragement and aid”, and partly from the high American tariffs which prevented them from selling us goods to pay their debts.
The crisis began in the Boden–Kredit Anstalt, the most important bank in Austria and indeed in Eastern Europe, which, like its fellows, had over expanded. It had suffered serious financial trouble in 1929, but various governmental and other sources had leaped to its aid, driven by the blind expediency of the moment telling them that such a large bank must not be permitted to fail.
Too big to fail anyone? We have heard that one have we not?
1929 in October the failing Boden–Kredit–Anstalt merged with the more solvent and stable Oesterreichische–Kredit–Anstalt, with new capital provided by an international banking syndicate
including J.P. Morgan and Company, and Schroeder of England, and headed by Rothschild of Vienna. The Austrian Government also guaranteed some of the Boden bank’s investment.
This shored up the shaky bank temporarily.
Bank bailouts by Government? Heard that one lately?
Germany, England, and most other European countries renounced their obligations
and went off the gold standard in the latter days of 1931 after France called their notes due.
The resultant European financial collapsed caused Americans to begin to doubt our financial institutions.
Greece, Italy, Spain among others, worsening financial crisis come to mind in today’s recession?
Throughout the European crisis, the Federal Reserve, particularly the New York Bank, tried its best to aid the European governments and to prop up unsound credit positions. In mid-July, the
executive committee of the New York Bank had an all-day conference with the leaders of J.P. Morgan and Company, and there decided to follow the “lead” of the Bank of International Settlements, the “club” of European central banks. It therefore loaned money to the Reichsbank to purchase German acceptances, and made special loans to other Central Banks to relieve frozen assets
there. The New York Federal Reserve loaned, in 1931, $125 million to the Bank of England, $25 million to the German Reichsbank, and smaller amounts to Hungary and Austria. As a result,
much frozen assets were shifted, to become burdens to the United States. The Federal Reserve also renewed foreign loans when borrowers failed to pay at maturity.
See also US bails out the Euro Sept. 16, 2011.
Europe was not the root cause of the failure of our economy in 1931, but many moves made by our Government in collusion with Investment firms such as J. P. Morgan and the Rothschild’s stretched our already weakened economy to the breaking point.
Hoover, from the beginning of the recession turned depression, started his course unerringly toward the violation of all the laissez-faire tenants and as a consequence, he left office with the economy
at the depths of an unprecedented depression, with no recovery in sight after three and a half years, and with unemployment at the terrible and unprecedented rate of 25 percent of the labor
force. His views of Government intervention failed.
President Hoover was defeated in a Landslide for his failures in handling the economy.
Hoover’s own summary of his program, during his Presidential campaign in the fall
of 1932 showed he failed to understand the significance of Historical precedent.
“we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. . . . For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered. . . . They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.
Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for . . . “the common run
of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom. . . . We determined
that we would not follow the advice of the bitterend liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction”.
Franklin D. Roosevelt for the most part simply followed the course already set by President Hoover. He did however do one thing that even his predecessor would not so. He created a Federal juggernaut, a Government monolith that remains with us even 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.
The day after taking his oath of office President Roosevelt Invoked 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 one act arguably deepened the Credit crisis that Americans were already feeling. The American people already reeling from a lack of confidence in those very institutions saw this act by President Roosevelt as further evidence that the economic malaise was the bank’s fault.
Occupy Wall Street protest comes to mind. This administrations constant finger pointing at anyone but themselves is nothing new. Presidents have been doing that for a long time indeed.
Roosevelt and his economic advisers 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.
What followed was a collection of schemes and 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.
These schemes, including Gold confiscation continued through the late 1930’s continuing a failed economic policy, hoping for a different result. 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.
A very good reminder of the “Wag the Dog” theory.
As we have seen nothing is new. It really has all been done before. Neither party is offering any new ideas. This administration is simply reliving the past. The key here is that they have failed to learn from it. They keep expecting different results from efforts that have failed before.
What was that definition of insanity?
In this essay series I felt it necessary to review certain key data points in History that clarifies actions taken then and now. Each and every administration has had failures. This is a given. Each and every administration has a duty to learn from and not blame the previous administrations for its failures, but also to copy its successes.
Failure to learn from the past mistakes is tragic at best culpably negligent at worse. Americans also have a duty. We have a duty to police our Government, to be wary and watchful for excesses of power. If we fail to perform this most basic of responsibilities then we truly deserve the Government we get.
For an appreciation of the importance of this fact for American monetary
history, see Vera C. Smith, The Rationale of Central Banking (London: P.S. King
and Son, 1936).
Prelude to Depression: Mr. Hoover and Laissez-Faire 187
From his acceptance speech on August 11, and his campaign speech at Des
Moines on October 4. For full account of the Hoover speeches and anti-depression
program, see William Starr Myers and Walter H. Newton, The Hoover
Administration (New York: Scholarly Press, 1936), part 1; William Starr Myers,
ed., The State Papers of Herbert Hoover, (New York. 1934), vols. 1 and 2. Also see
Herbert Hoover, Memoirs of Herbert Hoover (New York: Macmillan, 1937), vol. 3.
Benjamin M. Anderson, Economics and the Public Welfare (New York: D. Van
Nostrand, 1949), pp. 232ff.
Clark plausibly maintains that the true motive of the New York Federal Reserve
for these salvage operations was to bail out favored New York banks holding large
quantities of frozen foreign assets, e.g., German acceptances. Ibid., pp. 343f.