Abouts On The Great Depression

Abouts On The Great Depression

To my amazement the Great Depression serves as a natural debating point
that "justifies" or "refutes" various economic policies. The Great Depression
and the New Deal are complex topics that are open to many interpretations. The
Great Depression was the worst economic slump ever in U.S. history, and one
which spread to virtually all of the industrialized world.

Seeing the order in which events actually occurred dispels many myths
about the Great Depression. One of the greatest of these myths is that
government intervention was responsible for its onset. Truly massive
intervention began only under the presidency of Franklin Roosevelt in 1933, who
was sworn in after the worst had already hit. Although his New Deal did not cure
it, all the leading economic indicators improved during his tenure.

To understand the Great Depression, it is important to know the theories
of John Maynard Keynes. Keynes is known as the "father of modern economics"
because he was the first to accurately describe some of the causes and cures for
recessions and depressions.

In a normal economy, Keynes said, there is a circular flow of money. My
spending becomes part of your earnings, and your spending becomes part of my
earnings. For various reasons, however, this circular flow can falter. People
start hoarding money when times become tough; but times become tougher when
everyone starts hoarding money. This breakdown results in a recession.

To get the circular flow of money started again, Keynes suggested that
the central bank, the Federal Reserve System, should expand the money supply.
This would put more money in people\'s hands (through the multiplier effect),
inspire consumer confidence, and compel them to start spending again.

A depression, Keynes believed, is an especially severe recession in
which people hoard money no matter how much the central bank tries to expand
the money supply. In that case, he suggested that government should do what the
people were not: start spending money. He called this "priming the pump" of the
economy. I think that most economists believe that only massive U.S. defense
spending in preparation for World War II cured the Great Depression.

After the success of Keyne\'s economic beliefs were proven, almost all
free governments around the world became Keynesian. These policies have
dramatically reduced the severity of recessions since then, and appear to have
completely eliminated the depression from those who follow such economic beliefs
throughout the world.

Events of the 1920s

The Roaring Twenties were an era dominated by Republican presidents:
Warren Harding (1920-1923), Calvin Coolidge (1923-1929) and Herbert Hoover
(1929-1933). Under their conservative economic philosophy of laissez-faire
("leave it alone"), markets were allowed to operate without government
interference. Taxes and regulation were slashed dramatically, monopolies were
allowed to form, and inequality of wealth and income reached record levels. The
country was on the preferred gold standard, and the Federal Reserve was not
allowed to significantly change the money supply. Many try to blame the
worsening of the Depression on Hoover, for supposedly betraying the laissez-
faire beliefs.

As this time line will show, almost all of Hoover\'s government action
occurred during his last year in office, long after the worst of the Depression
had hit. In fact, he was voted out of office for doing "too little too late."
The only notable exception to his earlier idleness was the Smoot-Hawley tariff
of 1930.

But much more important, the economy was clearly turning downward even
before Hoover took office in 1929. Entire sectors of the economy were depressed
throughout the decade, such as: agriculture, energy and mining. Even the two
industries with the most spectacular growth - construction and automobile
manufacturing - were contracting in the year before the stock market crash of
1929. About 600 banks a year were failing. Half the American people lived at or
below the minimum subsistence level. By the time the stock market crashed, there
was a excessive amount of goods on the market, and inventories were three times
their normal size. The fact that all this occurred even before the first act of
government intervention is a major refutation of laissez-faire ideology.



•During World War I, federal spending grows three times larger than tax
collections. When the government cuts back spending to balance the budget in
1920, a severe recession results. However, the war economy invested heavily in
the manufacturing sector, and the next decade will see an explosion of
productivity... although only for certain sectors of the economy.

•An average of 600 banks fail each year.

•Agricultural, energy and coal mining sectors are continually depressed.
Textiles, shoes, shipbuilding and railroads continually decline.

•The value of farmland falls 30 to