Hoover & FDR and the Great Depression Garrett Johnson : >Hoover didn't make that huge tax increase until 1932, which was >almost the bottom of the depression. Smoot Hawley was either >1930 or 1931, after the depression was well on its way. ..... >Tax cuts alone do not a supply sider make. Other presidents >have cut taxes, like JFK but are not labelled supply-siders. >In fact, only supply-siders try to label JFK as one of them. >Most economists don't. Hi, JFK cut taxes because he thought the high rate was reducing economic growth. That is "supply side" thinking. For more on this, see the Supply Side University web page at: http://www.polyconomics.com/univ.htm "Things to come cast their shadows before them" The Smoot-Hawley tariff bill passed the House in March 1929, and stocks fell temporarily. Relatively few people were buying and selling stocks in those days as compared with today, and they kept a close eye on events that they thought would change the value of the stocks (and of the US economy). Most expected that the tariff would harm the economy and thus lower the value of US companies and of their stocks. President Hoover had indicated that he would sign the tariff if it reached his desk. So the only chance to stop it was in the Senate. The majority of Senators had expressed support for it, but it could still be stopped in committee. In fall of 1929 the tariff made progress in committee and its chances for a Senate vote improved. E.F. (Bud) Hutton, the founder of the famous Wall Street firm was then a broker in Seattle. In his biography he explains how he avoided the crash by selling on the news of the progress of the tariff act. Soon everyone tried to beat the tariff by selling before it became law, and that resulted in the October 1929 crash. The bill was not signed by Hoover until June 1930, and did not actually take effect until April 1931. But its impact on the stock market came long before it took effect. "Bad Medicine" There had been many stock market "crashes" (called "panics") during the 1800's, but they did not create depressions. It was more the attempts to "cure" this crash than the crash itself that resulted in the decade long Great Depression. Hoover, far from being a "do-nothing Republican", was very aggressive and activist about trying to get the economy re-started. He created the Federal Farm Board, the Tariff Commission, and the Reconstruction Finance Corporation. He signed the Smoot-Hawley tariff, and a tax increase that raised the top income rate from 25% to 63%. The tariff triggered a number of reprisals from other countries, and world trade quickly dropped to about one third of its pre-tariff volume. Some have claimed that total world trade was not large enough during the 1920's for the reduction to have that much effect, but export industries are usually the most efficient ones, with jobs paying higher than average wages. "Dick Eastman" adds: > The Great Depression was caused when New York elite top Bankers, Traders, > and Brokers sold short and initiated margin calls. The market plumeted. > As stocks were liquidated to pay margin lenders. This contracted the > money supply, which eventually reduced prices (deflation). > <...> > >And why did wages not fall with prices? >Hoover was an activist, unlike Coolidge. >Consider all previous depressions, those that arose in the >Administrations of: >Van Buren (the Establishments revenge for Jackson vetoing the >(central) Bank of the United States; >Buchanan (the Establishment >pushing the South into succession so they could finance the Civil >War and then take over the spoils in the so-called reconstruction); >Grant; >Cleveland (so much for the only Democrat and populist of >the Guilded Age); >Theodore Roosevelt (to create the anger and upset that >would make the people beg for monetary reform, begging >that would be answered by the plan of the Bankers own >design, theFederal Reserve System); and >Wilson (readjustment after World War One, when Europe >stopped buying to feed its soldiers now returned to >farming etc. No Marshall Plan after WW1). >IN ALL OF THE ABOVE THE DEPRESSIONS WERE PRACTICALLY >IGNORED BY GOVERNMENT IN ANY OFFICIAL ACTION. >But, as you say, Hoover was an activist. Yet part >of his activism was to bring pressure to bear on >employers NOT to reduce wages--the very thing >that would bring the post-stock-market-crash-deflation >into equilibrium he would not allow! Ironically, >Coolidge would have let the Depression run its course >without intervention so it could go the usual cycle. >Men would be let off, but they would go right back >to work again at a lower wage. Unemployment was >always unheard of in this country before the Great >Depression. The labor market was a true market, >self adjusting and efficient. Hoover was an >activist, but an activist in the wrong direction, >just like FDR and his red "brain trust." Me again: FDR continued the Hoover policies and added some of his own. Most significant was the way he reduced the value of the US dollar. He prohibited the private ownership of gold and forced its exchange at $20.67 per ounce. Then he changed the price to $35 per ounce for international trade. The effect of this was to withdraw billions of dollars of liquidity from the US economy at exactly the time when more was needed. FDR also pushed through the Agricultural Adjustment Act of 1933. Since there was a problem of hunger in the US, the FDR 'brain trust' decided that farmers should be paid to destroy their crops and kill their pigs. If you don't understand how destroying food will reduce hunger, well then you are just not 'brain trust' material. He also passed the NIRA (National Industrial Recovery Act) in 1933, and formed the National Recovery Administration (NRA) to deal with the depression by fixing prices. And the Wagner Act encouraging the formation of labor unions. This all reminds me of this description of the medical treatment given to King Charles II of England, from Loren MacKinnsey: "(The) King, while shaving, fell unconscious in his bedroom. The following treatment was employed by the royal physicians. A pint of blood was extracted from his right arm; then eight ounces from his right shoulder, next an emetic two physics, and an enema consisting of 15 substances. Then his head was shaved and a blister raised on his scalp. To purge the brain, a sneezing powder was given; then cowslip powder to strengthen it. Meanwhile more emetics, soothing drinks, and more bleeding; also a plaster of pitch and pigeon dung applied to the royal feet. Not to leave anything undone, the following substances were taken internally: melon seeds, manna, slippery elm black cherry water, extract of lily of the valley, peony, lavender, pearls dissolved in vinegar, gentian root, nutmeg and finally 40 drops of extract of human skull. As a last resort bezoar stone was employed. But, inspite of their best efforts, the patient died. ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth. Subject: Re: WWII Date: Mon, 16 Aug 1999 08:14:57 GMT From: oldnasty@mindspring.com (Grinch) Organization: Happy Skeptics of America Newsgroups: sci.econ References: 1 , 2 , 3 On Mon, 16 Aug 1999 01:11:08 GMT, conover@inow.com wrote: >constantinople@my-deja.com writes: >> >> The Depression was caused by a combination of monetary >> contraction (i.e. deflation) and government price fixing (wages >> were kept artifically high). Real wages rose by 25% as a result >> of the price level falling by 1/3 combined with policies >> preventing a fall in wages. With such a steep and artificial, >> government-created rise in real wages, it's small wonder that >> businesses could not afford to create full employment. The >> Depression was ended by monetary expansion (i.e. inflation), >> which reversed the conditions that had caused it, lowering real >> wages to their correct level. The monetary expansion was created >> to pay for WWII, just as a monetary expansion had been created to >> pay for the Civil War. >> > >And the depression that affected 1/3 of the world's countries at the >time-including most of the industrialized world-had nothing, >whatsoever, to do with it? >Of course, such "contagion" is difficult to explain by the traditional >macroeconomic dogma of monetary policy, The Depression today actually is quite well understood by economic historians, and not difficult at all to explain (with 50 years' hindsight and data). For a quick & easy read see: _Lessons from the Great Depression : The Lionel Robbins Lectures for 1989_, by Peter Temin of MIT, MIT Press. For more comprehensive coverage see: _Golden Fetters : The Gold Standard and the Great Depression, 1919-1939 _ by Barry Eichengreen of University of California, Berkeley and the National Bureau of Economic Research, Oxford University Press. Granted, neither the fact that the Depression is well understood nor the lessons to be drawn from it seem to have reached the general public. Economists are well-proven to be not very good at communicating with the public. Blinder's law: When economists agree about something they are ignored. But that's for another thread. >but why did the US depression >happen in 1930 when such policies had been the prevailing wisdom for >over a decade and a half? Why not 1920? Why not 1935? > >Why 1930? Actually, late 1931. Until then the US economy had been going through a typical-for-the-era recession much like that of 1921. The consensus among economists and business forecasters at the time was strong recovery in late 1931 and 1932. Then, in September, in the midst of ongoing recession and deflation, the Fed raised interest rates 2 full points, from 1.5% to 3.5%, a 133% increase. (Can you imagine Alan Greenspan doing *that*?) It did this to meet its obligations under the gold standard, to stop a gold outflow. The result was immediate and calamitous. M1 fell at a 25% annual rate over the next three months, and M2 at over a 35% rate. The deflation that had been expected to end instead intensified, increasing real interest rates by much more than the nominal increase. The sudden shock to expectations is seen in a historic rush into cash -- as M1 and M2 collapsed at a never-befoore-or-since-seen rate, currency holdings and commercial deposits at the Fed rose. People quickly stopped lending in the risky markets because they realized they could avoid risk and get a safe positive return from holding cash. Borrowers realized that continuing deflation would make them repay loans at a higher real rate, so they stopped borrowing. Investment quickly dropped to literally almost nothing, and a vicious cycle of contraction produced a deflationary collapse that drove the economy down through 1933. (Interestingly, a few years ago all the best data collected for the 1920s and 30s was run though our own time's top econometric computer models. The idea was to see how the predictions of modern computers, armed with hindsight, 50 years' more theory and data collected after the fact, would match up against those of Irving Fisher and the pencil pushers of 1930. Surprise. The computers agreed closely with Fisher & Co., predicting imminent strong recovery in 1931-2, *until* the Fed raised rates sharply in '31. Study conclusion: The economic collapse was caused by the Fed. See: "Forecasting the Depression: Harvard versus Yale," by Dominguez, Fair and Shapiro, _American Economic Review_ 78:5 ) From this start in the US the Depression was transmitted around the world through the mechanisms of the gold standard (just as it was triggered in the US by the mechanism of the gold standard) with currency crises, bank panics, and rate increases that were meant to stop currency outflows and maintain fixed parities, but which hammered businesses and employment. (Sort of like the recent Asian crisis, only *for real*). That said, while the Fed *triggered* the Depression, it is too much the say the Fed *caused* the Depression. The fundamental causes which set up the Depression were: 1) World War I, which destroyed the pre-existing international economic order and left major structural imbalances in the world economy. 2) The (in retrospect) terribly misconceived attempt by all the world's political and economic leaders to restore the pre-war gold standard in the 1920s, even at pre-war parities, in a world it no longer fit. In theory, the gold standard is neutral on the whole -- gold flows that raise interest rates and slow growth in some countries should lower rates and spur growth in others. But amid the post-WWI economic and political realities, the attempt to reimpose the gold standard was systematically deflationary world-wide. 3) The fact that post-WWI, major nations like France and Germany (among others) were actively working to subvert each others' economies, while during the pre-WWI "golden era" there had been a great deal of active monetary coordination among all the major economies.. All of this is greatly simplified for a usenet post, of course. Eichengreen gives hundreds of pages of details and data on it all. But the major points are that WWI terribly damaged the world economy, both directly and though the politics it bequeathed to the post-war world; and the attempt to restore the gold standard intensified harmful pressures on the international economy when it should have still been in a recovery stage. So things had reached a state where they could fall apart when the Fed gave them a good hard kick in 1931. >Maybe monetary policies didn't have too much to do with it. And maybe >they did. They absolutely did. As every nation abandoned the gold standard, domestic deflationary pressures promptly abated. Ironically, Britain was a leader both ways. It was one of the first to go back on gold (Keynes approved -- one of the fun things about him is that you can find him speaking eloquently at some point or other on both sides of almost any major issue.) It adopted too high a parity and put itself through a grinding deflation before anyone else, disrupting international money flows in a way that helped set the stage for the Fed's actions in the US. Then it bolted from gold before almost everyone else and missed the worst of the Depression. Gold bugs would do well to study this whole period. >But at any rate, changes in monetary policy didn't fix >things for the decade of the 30's, As noted, the change in monetary policy of leaving gold had an immediate beneficial impact everywhere it occurred. After that, it depended on what policies a country followed. Some recovered much faster than others. The singular thing about the Depression in the US, even more than its depth, was its length. The structural damage done to the economy by the dive through '33 wasn't going to be undone quickly even with a magic wand. But the Fed then got off gold and loosened money in '33 and growth resumed quickly. Then in '36 the Fed dramatically increased the reserve ratio, tightening money, and FDR (who always seemed to be trying out several contradictory economic policies) adopted a contractionary budget. So there was another recession in '37 and unemployment went up again. All in all, it looks like monetary policy produced pretty much the expected results for the actions that were taken. Another reason unemployment stayed much higher, much longer in the US than elsewhere is that the New Deal policies of supporting high-prices and high-wages favored those who had businesses and jobs over those who didn't. Even an avowed Keynesian, Democratic, anti-Reagan historian like Temin details how those policies kept US unemployment higher than most anywhere else. Employment recovered much faster in countries that did not try to prop up profits, prices and wages with the cartels and price floors and such that the New Deal used. Consult the historical record for numbers and details. >and it was WWII that saved the >Roosevelt Presidency. He'd already had his full eight years. What was to save? ;-)