I’ve just started reading the Pulitzer Prize winning book by David Kennedy, Freedom From Fear. It’s part of the Oxford History of the United States. It zeroes in on the years between 1929 and 1945. Since this encompasses both the Great Depression and World War II, it’s a suitably mammoth book. It’s going to be a while to get through it.
I’ve just completed the first chapters that discuss the causes of the Great Depression and President Herbert Hoover’s response to it. I’d thought that I’d take just a little break and write down my thoughts before continuing on.
Probably like most, I had a pretty surface level understanding of the Great Depression. If I had to summarize, it’d be something like the stock market crashed on Black Thursday. This panic started the Great Depression. President Hoover, stuck in conservative ways of thinking, waited for natural economic forces to bring the economy back as it had in every other previous depression. It took the election of Franklin Delano Roosevelt to initiate a program of governmental activism to get the economy started again.
It turns out that essentially all of this is grossly simplified, if not actually wrong.
First of all, not only was there a Black Thursday (10/24/29, when the market dropped 11%) but there was also a Black Monday (10/28, when the market dropped 12%) and a Black Tuesday (10/29, when the market dropped another 12%). Some institutional investors stepped in and the market rallied. It started to decline again but then went through a multi-month recovery that continued through April of 1930. It then went through a steadier decline before bottoming out on July 18, 1930 (at an almost unimaginable Dow level of 41.22; compare that to the current level of around 34,000), having lost 89% of its value. It wasn’t exactly a one day lightning bolt.
Even that much of a drop did not cause the Great Depression. The fact is that, for all of the talk about shoeshine boys giving stock tips to Joe Kennedy, Americans generally were not invested in the stock market. There were previous crashes that caused havoc on Wall Street that had a much more modest effect on Main Street. It wasn’t stock valuations that caused mass unemployment.
As can probably be imagined, there wasn’t just one cause. First of all, there was a huge disconnect between American manufacturing and consumption. Simply put, we were making way more things than we could possibly consume. In such a case, the usual approach is to increase exports to other markets. However, the US had passed some pretty extreme protectionist trade (the infamous Smoot-Hawley Tariff Act) policies. This caused other nations to retaliate. Therefore, the usual export markets were closed, so we were sitting on a lot of unused inventory. What happens in that situation? Well, to move inventory you lower prices and reduce manufacturing. Lowering prices can dampen wages while reducing manufacturing causes layoffs. If people are laid off or have their wages reduced, they accordingly reduce their spending. Reducing spending causes reduced consumption. Reduced consumption causes increased inventory. And so and so on into an economic death spiral.
Andrew Jackson abolished the National Bank way back in 1833. Without this centralizing force, the US banking industry grew into a gallimaufry (a wonderful word that I just discovered!) of assorted banks of various quality. With little banking regulation in place, the banks were little prepared when their struggling customers began to demand their cash. A cash run at one bank would quickly lead to panic runs at other banks. Banks began to fail at ever increasing rates. This strangled the economy even more.
There were also problems beyond our shores. The Versailles Treaty was a disaster. Germany was both burdened by a war debt and economically strangled. It had no hope of paying its debts to the victorious Allies. The Allied countries of WWI in turn owed huge loans to the US. This led to an absurd situation in the 1920s of the US loaning money to Germany so that it could pay loans to the Allied countries so that they could pay loans back to the US. Once US banks started failing, this financial circle jerk seized up.
In response, desperate to stay on the gold standard, countries began to raise interest rates and to cut government spending to balance their budget. As we now know, doing these two things restricts money supply and the very last thing that you want to do when you are in a recession or a depression is to restrict the money supply. Doing so restricts consumption and low consumption is precisely what causes these economic events and makes them spiral worse.
All of that to say that, by the time 1932 rolled around, countries were in the midst of a devastating global depression. A depression that was not caused just because the Dow took a hit one day in 1929.
My second big misconception was about Herbert Hoover. The conventional narrative is that he was a free market purist that advocated letting natural economic forces set things right again. According to Kennedy, this is quite wrong and manifestly unfair.
First of all, Hoover seemed to be the perfect man for the job. He was a famed engineer. He literally wrote the book on mining engineering. His great humanitarian mission to feed the starving Belgians in World War I was acclaimed. His work at the Versailles Treaty impressed everyone (even though his ideas did not make it into the final treaty). He was a detail oriented technologist. What better man to have in charge when your broken country is in dire need of fixing?
Unfortunately he had two serious flaws. One is that his strength as a technologist was equally opposed by his weakness as a politician. The other flaw, perhaps a result of his Quaker religion, was his belief in selfless volunteerism instead of government mandates.
The fact is that he was actually an activist President with a broad vision of federal expansion into areas in which it’d never previously functioned. He started with a program to help farmers. As the economic crisis deepened, he began to think even broader. Several of his ideas prefigured the New Deal.
However.
He was predisposed to expecting business to step forward and execute these programs on their own because of their obvious benefits. In the early days, this actually happened. However, as the crisis deepened, businesses focused instead upon their own survival and abandoned cooperative programs.
Even if he was so inclined to direct federal action, his lack of political skills would have doomed his efforts. There were potentially progressive Republicans and Democrats that could have banded together to pass legislation, but he was not able to bring them together.
This brings us to another cause that I’d never previously read. In a previous post, I’d talked about how political parties sometimes acquired a near stranglehold on the Presidency (the Virginians of Thomas Jefferson, James Madison, and James Monroe being a great example). Well, if you take a slightly broader look at Presidential elections, there was one huge megatrend. From 1860 through 1928, there were a total of eighteen elections. Except for Grover Cleveland’s and Woodrow Wilson’s two terms, these were all won by Republicans (1864 National Union was basically Republican). Republicans won 14 out of 18 elections in 68 years.
Therefore, even though the country was in a serious crisis, the Democratic party was not at all interested in giving a lifeline to Hoover. Their primary purpose was to tar Hoover (and by extension, the Republican party) with all of the stench of the Great Depression. Even after Roosevelt won the election in November, as the country continued to crater, Roosevelt passively sat by as Hoover somewhat plaintively and desperately tried to include him. This continued on until Roosevelt was inaugurated in March of 1933.
If I’ve gained nothing else from reading Freedom From Fear, I now at least have a more accurate understanding of the causes and the course of the Great Depression.
dorkenstein 