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.