Wikinvest Wire

A few thoughts on the Great Depression

Thursday, January 21, 2010

In the weeks ahead, there should be at least another item or two here on the subject of the Great Depression as I've taken to re-reading a couple of very important books on the topic after not having touched them for years.

Today, it seemed like a good idea to share a few thoughts.

Anyone with a similar interest is encouraged to have a look at these two works as they seem to cover all the essentials - the 1920s run-up to the late-1929 stock market crash and then the Great Depression in the 1930s.

Both were written decades ago, having been updated a number of times since, and there appear to be a slew of more recent offering on the subject over at Amazon, though I've not looked into any of the newer ones. Some time ago, I selected these two as being the best of the bunch:

Murray Rothbard - The Great Depression
Robert McElvaine - The Great Depression: America 1929-1941

(Note: You can read Rothbard's book online at Mises here(.pdf).)

Anyone who may also happen to crack these two open would be well advised to repeat the process that I'm about two-thirds of the way through now - start with McElvaine's book and read until you reach 1931, then switch to Rothbard's that covers the period from the early 1920s up until 1931, then switch back to McElvaine for the years after 1931.

Since McElvaine's account is more focused on the political and social details it provides a good setup for Rothbard's book that deals more with financial markets and monetary policy. In this way, you'll get the full treatment in what is mostly chronological order.

Anyway, a few thoughts that are worth sharing at this juncture:

1. The 1920s and the last 15-20 years have some shocking similarities

In reading about the 1920s, there are striking similarities between that period and the last 15 or 20 years regarding productivity gains, credit expansion, and the rise of the consumer culture - what should be looked back upon now as seminal developments that were predecessors to both the 1929 crash and the one in 2008.

Back in the 1920s, it was advances in electricity, automobiles, home appliances, and farming equipment that produced radical changes in the economy, changes that were misconstrued by the central bank as being a "green light" to err on the side of monetary policy that was "too easy".

The rapid expansion in consumer credit was another attribute that the two periods shared as the 1920s marked the first decade in which advertising became commonplace in American culture. Consumers were prodded to "buy now and pay later" for any number of new products that came with the technological advances of the time such as radios, refrigerators, washing machines, and - most importantly - automobiles.

In many ways, the changes that resulted from the widespread use of autos in the 1920s were like the changes that came from the widespread use of computers in recent decades.

This was the first economy-wide instance of credit-enabled pulling of consumer demand forward, a case of creating (what was believed to be at the time) a new era of prosperity that ultimately proved to be fleeting, as appears to be the case today.

2. The Fed's role in sowing the seeds of destruction is under-appreciated

While the Federal Reserve isn't credited with doing all that much from the time that it was founded in 1913 until after World War I, that changed in a big way in the 1920s. As recounted in great detail by Rothbard, continuous "inflationary" policies by Chairman Benjamin Strong from the early-1920s up until about 1928 played a key role in the crash.

Money and credit were simply allowed to expand too quickly - faster than ever before with the exception of periods when the nation was at war - and, when masked by productivity gains that kept consumer prices from rising, this "stimulated" other parts of the economy to inflate asset bubbles of one sort or another, like real estate in Florida or stocks in New York. Another major reason for the inflationary policies of the U.S. central bank in the 1920s was that it was helping Great Britain to get back onto the gold standard in the aftermath of the first world war.

It shouldn't come as too big of a surprise that a focus on stable consumer prices rather than the growth of money supply and credit first became popular amongst economists during this decade. Of course, to anyone looking back at the era now, the results are seen to be both unsurprising and disastrous, but, what is even more astonishing today is that most economists still view the Great Depression as almost materializing out of thin air with the October 1929 stock market crash. You'll hear a few comment on ill-advised tightening by the Fed in 1928 and early-1929, but it was the expansion that ran from 1923 to 1927 that did the real damage.

3. The role of Roosevelt continues to be misunderstood

In the nation's collective conscience, Herbert Hoover continues to be the primary culprit for the severity of the depression from 1929 to 1932 and Franklin Delano Roosevelt is often times seen as a White Knight who came in to save the day in 1933. In reading the history as told by both McElvaine and Rothbard, with few exceptions, FDR policies were simply a continuation of those that were put into place by Hoover, however, the results were much better from 1933 on for a number of reasons, the most important being that the depression had already had three years to "run its course".

It was Herbert Hoover, not FDR, that broke the mold of what had been a Laissez-fare approach by government in regards to the economy, a dramatic change from the Coolidge years when the president is said to have made little use of his office yet, to this day, is credited with fostering "Coolidge Prosperity" for most the decade.

The combination of central bank policies in the 1920s and an over-active engineer in Herbert Hoover were what fostered and prolonged, respectively, the worst economic period in American history and, while Roosevelt was much more effective in restoring confidence than his predecessor, the most important part of history was made before his arrival.

To this day, it striking to me that perhaps the greatest lessons of the Great Depression have still not yet been learned.

Bookmark and Share


Anonymous said...

I don't have time to share my thoughts on this, but, I think you are summarizing it really well. Some of the insights that you share are the same insights or thinking that I had based on what I have read - mostly on the web, and not in books. May be I will take a look at those books - per your suggestion.

More later

AJ said...

Funny how a President can often be blamed (or conversely, praised) for his predecessors failures (or success).

I am curious as to whether there is any discussion of wealth and income inequality in the books you cite. In order to support economies of scale, one would need a particularly vibrant middle class to provide for such scale. An HDTV only costs $1000 these days because there are so many of us that they can amortize the huge development costs across an equally huge number of sets to sell.

But if you're in the top 2% of the wealthy and you simply must be in the top 1%, well then you find loopholes or use offshore accounts or other financial trickery. And thus, the middle class is squeezed for, say, taxes that the upper class can avoid.

Maybe they even create some fancy label, say "trickle down", to justify taking 15% of the capital gains a man makes from sitting on his ass and giving money to other people ("investing") who then proceed to do all of the hard work and have twice that taken out in taxes. And then they'll turn around and criticize the working man for not working hard enough when his pension is pilfered by the CEO and his health insurance policy is rescinded because of a pre-existing medical condition, both policies designed to make the fat man fatter at the expense of everyone else.

They'll tell you we live in a meritocracy, but how many of them inherited their fortunes, or made them through various family connections unrelated to merit? Sure, Bill Gates can succeed, but any number of humans are as smart as him, and he was just lucky to be in the right place at the right time. Even luck is an exception to the norm when we have a US Senate seat that is referred to by the family's last name.

No matter the myriad complex reasons underlying the economic redshift that is occurring, the end result is that there are fewer people who can buy the wealthy man's stuff, and if this continues much longer then economies of scale will collapse. Without the middle class enablers, "wealth" as we know it will no longer be possible.


Ben said...

I read McElvaine's take when it first came out, but a rereading is certainly in order in light of recent events. Good comparisons- I agree, the major lessons are as yet unlearned, unfortunately!

I would highly recommend Amity Shlaes' The Forgotten Man if you're in the mood for a trilogy.

Anonymous said...

This is really interesting in light of Bernanke's comments from a couple weeks ago that monetary policy was not responsible for the housing bubble.

Dan said...

I like those books. Thanks for the reading order suggestion.

getyourselfconnected said...

Kind of OT but,

Japan has had a lost 20 years due to deflation caused by "Not enough Keynesian Spending" but I fail to see Japanese trying to paddle to China or Taiwan on rafts to escape the terrible conditions.

Why is it unique that every US downturn must be fought to all ends to avoid a Depression? There is no such thing as a bubble/bust cycle?

buy kort r4i said...

The Great Depression was caused by underlying weaknesses and imbalances within the U.S. economy that had been obscured by the boom psychology and speculative euphoria of the 1920s. The Depression exposed those weaknesses, as it did the inability of the nation's political and financial institutions to cope with the vicious downward economic cycle that had set in by 1930.

Flow5 said...

The bubble prior to the Great Depression is similar to the buildup prior to our current crisis (another bubble), but the prescriptions required to extract us from the Great Depression were completely different.

me said...


One book I would like to add and highly recommend is The Great Depression by Benjamin Roth. This is a real time diary of what happened back then including stock prices. I grew up in Youngstown and knew the banks and the mills but this diary was amazing how people thought. So many false starts like it over, no money coming in.

Anonymous said...

To this day, it striking to me that perhaps the greatest lessons of the Great Depression have still not yet been learned.

Because we dont have any true understanding of economics. Without that, there is no way to agree on what worked and what did not.

Economics is astrology, alchemy, it is not a science. And may never be. The problem it that a large amount of wealth can be made or lost based on what theory drives the formation of the economy. If a large number of people stood to loose significant wealth if we 'discovered' that the Earth revolved around the Sun, how long would it be before that fact would accepted? The Church tried very hard to bury that one fact because they saw it as a threat to their power.

This recession / depression / GFC is a mass extinction event for economist. One study reviewing economic papers showed that out of approx. 20,000 professional economists, only around 35 successfully predicted this crisis. Maybe that means the 35 were right. Or maybe out of a sample size of 20,000 that is just the number of people who called it on pure dumb luck.

Cast dem bones, tell the future.

Hopefully the foundations of a real science can be built using the rubble of discredited theories. I, however, am not optimistic.

Hugo Penteado said...

Maybe the mother of all mistakes and economic distress is the naive misunderstanding that put the planet as a subsystem of the economies. Reality is striking: the economies are a vulnerable and dependent subsystem of the planet; our economic system can not grow forever and an exponential growth based on flows as if planet was endless is a collision route that already put live in the third biggest extinction of the last 4.5 billions years (indeed the biggest of the last 65 millions of years).

Dan said...

Economics is indeed a science. It is not a "hard" science. it is a social science. Our problem is that leading thought is trying to approach economics as one would approach physics where what is needed is to approach it as sociology. The Austrian School takes the latter approach. I'm willing to bet that the 35 economists out of the 20,000 polled that you cite were of the Austrian ilk.

Well, the Austrian School firmly puts the economy as s subsystem of the planet. This naive misunderstanding is not within the Austrian School, I can assure you. The Austrian School examines economics from an evolutionary perspective and quite plainly states that it is the study of the distribution of scarce resources to people of varying abilities.

Worlds Edge said...

Democratic Party Platform, 1932:

We believe that a party platform is a covenant with the people to have [sic] faithfully kept by the party when entrusted with power, and that the people are entitled to know in plain words the terms of the contract to which they are asked to subscribe. We hereby declare this to be the platform of the Democratic Party:

The Democratic Party solemnly promises by appropriate action to put into effect the principles, policies, and reforms herein advocated, and to eradicate the policies, methods, and practices herein condemned. We advocate 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. And we call upon the Democratic Party in the states to make a zealous effort to achieve a proportionate result.

Gotta love it. :) link:

Jin said...

This is going to be one of the wrost turn in history. Watch this coming year, it's going to be nasty.

Anonymous said...

Sorry, but economics can hardly be referred to some kind of science. There are no natural laws that can be derived to tell us how to run monetary or fiscal policy.

Yes, we can delude ourselves with all kinds of fancy mathematical formulas, but in end how can they be relied upon when the underlying assumptions are constantly shifting.

In the end, there is no substitute for common sense. Something that was sorely lacking in the bubble years of the 1920's as well as the 2000's.

Anonymous said...

@aj - Guess you are unaware that Bill Gate's mom was good friends with a board member of IBM? They both sat on some Foundation.

But aside from that, I wholly agree with your comments. There was grinding povery in the 20s that most ignored or pretended didn't exist before the 30s and now that most of the people old enough to remember those years are gone we are battling with revisionist history as well.

eg - 'Austrian school'/laissez-faire, gold standard and all - which was actually the mainstream school of economic thought before the depression. It didn't work so well, but now those lessons are being thrown down the memory hole and neo-con supplyside monetarist crap is being wrongly called 'Keynesian' by people whose understanding of economics comes from Ron Paul blogs and wikipedia.

I wouldn't, for example, call Roubini an 'Austrian schooler', and the Austrian schoolers that did 'foresee' this credit crisis had been calling for it since the mid-1990s.

  © Blogger template Newspaper by 2008

Back to TOP