We don't. There are no guarantees in this world. Based on what I'm hearing from Wall Street, I'm pretty sure that something bad will happen if we let a whole bunch of banks fail. But I can't promise that everything won't be fine without a bailout. Anyone who promises you that he knows exactly what will happen--whether he is screaming that everything will be fine without a bailout, or that we'll end up back in the 12th century--is both smugly ignorant, and probably trying to sell you something. A distressing number of people commenting on these events seem to believe that we are living in a novel, where the events will unfold with the certainty of a plot contrived by a writer over a long, boozy lunch. The real world is messy. No system that can be outlined in a moderately long book ever works entirely as expected.
We also don't know the bailout will work. We could end up back in the Great Depression anyway. Frankly, we have two data points on massive financial crises that afflict large developed countries which borrow in their own currencies: the Euro-American depression of hte 1930s, and Japan in the 1990s. A lot of what we thought we had learned about dealing with these kinds of crises from the Great Depression failed to stop Japan's decline. What we think we've learned from Japan may turn out not to work on our economy--though, knock wood, hopefully we won't find out. The only surefire way we know of ending such a depression is World War II.
My basic reasoning is this: given just how badly the Great Depression sucked, I'm willing to gamble on stopping it, even if that gamble fails, even if it is not necessary (a question that, if we actually go through with it, will be much argued and never answered). I'm not willing to gamble for the bankers; the worst thing that will happen to them is that they retire on a pittance, or take a boring job somewhere. I'm worried about the 40 million or so people who might end up out of work, and with nowhere to go. I'm willing to do quite a bit to stop that from happening, even let the bankers off scott free. I don't think it's actually necessary to do that, but if I have to choose between helping the 40 million, or expressing my moral outrage--well, there's always skywriting.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
Anecdote warning etc, but most of the people at my office have been quite vocal that they'd rather see us go into another depression than have a dime of their money go to help investment bankers. The visceral hatred for bailing out the wealthy is quite noticable in rural areas, regardless of the potential risk by not doing so.
And yes, politicians will lose elections because they voted for it. Lots of them.
Is it not possible that the bailout would do more harm than good, pushing our national debt to the point where bondholders begin to think it won't be paid back, increasing rates and bankrupting our currency?
Why not just take a wait and see approach, and maybe bail out some banks later after a few are permitted to fail? The securities should cost less for the government when banks really do start panicking and forcibly selling everything they've got. Bondholders will take some losses but our government will have a better chance of recouping it's (our) wager.
Noticed you mentioned the Great Depression I feel much like you this is _a must_ trial _deal. I am 82 years old and remember the depression and the dust bowl days.The people today would not believe the suffering that went on. I was just a kid but it is still in my mind the hardships and suffering that went on.Hope this never happens again in Us. So we must go forward with the bail out as it is called.
most of the people at my office have been quite vocal that they'd rather see us go into another depression than have a dime of their money go to help investment bankers
Be careful what you wish for...
WWII did NOT end the Great Depression, it merely distracted us from it. Employment there was, yes, but economic well being there was not. Rationing, price controls, getting shipped 10000 miles away to be shot at, and so on, are not the hallmarks of prosperity.
What ended the Depression was the END of WWII, when we finally unshackled the economy and let it work again.
Be interested to know what difference you think the amount of US household debt will make to the Great Depression/Japan analogy.
We also don't know the bailout will work. We could end up back in the Great Depression anyway.
I think Gary Becker and Joseph Stiglitz have been fairly dismissive of this scenario.
Frankly, we have two data points on massive financial crises that afflict large developed countries which borrow in their own currencies: the Euro-American depression of hte 1930s, and Japan in the 1990s. A lot of what we thought we had learned about dealing with these kinds of crises from the Great Depression failed to stop Japan's decline. What we think we've learned from Japan may turn out not to work on our economy--though, knock wood, hopefully we won't find out. The only surefire way we know of ending such a depression is World War II.
Per capita income in the United States had, by 1940, returned to the levels of 1929. The economy grew quite rapidly between the summer of 1933 and the winter of 1941, bar for a period of about 18 months in 1937-38. The Depression was over prior to the War, although there remained severe imbalances in the labor market. About 6 or 7 % of the workforce was unempoloyed and another 9 % stashed in low productivity jobs in the Works Progress Administration, the Civilian Conservation Corps, and other agencies.
It should also be noted that Japan's decline has been merely relative. The country had fifteen years or so of low economic growth, not an economic contraction on the order of 30% of national product. During those fifteen years, rates of unemployment were generally under 5%. The only thing that Japan's economic blah had in common with the Depression was that a financial crisis was the principal precipitator.
IIRC, the economic contraction Korea faced in 1997-98 was on the order of 7% of GDP, and the debt to equity ratio of some of the diversified business groups that were preeminent in the Korean economy was on the order of 6 to 1. The economic contraction in Mexico during the Tequila crisis was on the order of 8%. That in Argentina seven years ago was on the order of 13%.
Please note also that the sort of implosion of aggregate demand that was occuring prior to the beginning of the banking crisis in November 1930 is not occuring now and can certainly be ameliorated by public expenditure in a way it was not in 1929-33.
I do have a question for you. There has been all of this discussion of a run on money market funds last week. The depositors in these funds would be compensated with cash and commercial paper, no? Is commercial paper owned by individuals considered a liquid asset? If the cash is removed from money markets an deposited in banks or used to purchase Treasury bills, you see a decline in M2 and an increase in M1 and L, no? What would be the effect of that on the real economy?
What's most frustrating about the bail-us-out-now crowd is their desire to act is driven _COMPLETELY_ by ignorance. I mean that in the sense that no one knows what the securities in question are worth and no one knows what is going to happen if we get the bailout or if we don't. So we're letting fear drive a decision that's going to affect millions of Americans and reinforce the notion that crime (or at least in this case, monumental stupidity) really does pay.
Instead of taking the time to work things out, we're going to let the same group of idiots who got us into this mess in the first place twist our arms with shady used car salesman tactics and predictions of Armageddon so they can have EVEN MORE money to gamble with!
Do you advocate giving alcoholics a six-pack to help them overcome their addiction? Why, oh why, would you even consider for one second giving these morons MORE MONEY? Can you seriously not see that we've got the fox guarding the hen house here?
What ended the Depression was the END of WWII, when we finally unshackled the economy and let it work again.
There was a severe economic contraction in 1945-47 (on the order of 10% of domestic product) and masses of demobilized soldiers were out of work. We have not had a recession anywhere near as severe since that time.
Megan, you're probably right but it is hard to accept. Bush had his best Iraq not 'not imminent threat' face on last night. I had to wait for the transcript, pretty superficial.
Bernanke and Paulson have been doing the Harlem Globetrotter act all week. (He never makes bad economic policy. He never makes bad economic policy. I mean, he never makes bad economic policy twice in a row!)
At least we can be grateful that the big government conservatives deregulated financial markets before deregulating nuclear energy. Meltdown is just an expression.
Okay, that's it, you're off my blog reader. Kevin Kelly has
a piece up at the Technium showing how one can go about uncovering major flaws in a system even if those flaws were never predicted and have yet to make any serious impact on the system. You look at trend patterns-the long duration as historians know it, and not just the economic ones-and then you look for the ugly in the pattern. Being this myopic when you have shown great insight many times before is ridiculous. Can you predict the future with certainty? Of course not. But you can with great probability.
Lack of credit to businesses in the non-financial sector is what is supposed to threaten the New Great Depression. I don't see why we have to assume such credit can only be supplied by the aggressive major banks that are holding all the crummy loans and derivatives. There are hundreds, maybe thousands, of smaller banks in this country, with stodgy, unimaginative leadership, that are financially sound, holding little of the bad paper. These banks could supply the necessary credit for nonfinancial businesses if their resources were augmented sufficiently.
The Treasury could work through these regional and local banks, augmenting their resources by loaning them money (merely depositing money in a bank is equivalent to making it a loan), cutting out entirely from the deal those major banks which have caused the current problems. There is no need to further reward the stupidity and cupidity of Wall Street with large sums of taxpayer money. The major banks will survive or not; it doesn't have to be important to the rest of us.
The advantages of this approach: no reward for the bad actors (and "moral hazard" for the future); potentially little cost to the Treasury; avoiding all the difficulty in pricing, buying, disposing the bad assets, and of trying to recover losses to the Treasury (i.e., taxpayer) from overpaying for the bad assets.
You mean to say that Obama really doesn't have a clue?.....aw man....
@matthew
I'd argue that the "moral hazard" isn't the bailout - it's hard to imagine bankers a decade from now formulating their policies on the assumption that $700b in liquidity is always around the corner - but rather it was the whole GSE system that propped up Fannie and Freddie and encouraged them to give risky loans for profit and altruism.
On the surface I like your suggestion of investing the solid Fed assets in small banks instead of flaky big ones, but I suspect that the incredibly intertwined nature of big banks' holdings would screw the economy pretty well if they collapsed, even if capital was available from other sources.
Won't be another Great Depression, at least as we knew the first one. No way.
The killer in the Great Depression was the 25% deflation over three years -- that increased everybody's debts in real terms by 25% and pushed real interest rates up towards and into double-digits, even as everybody's income was falling.
There is no way that is going to happen again, never. Least of all with Bernanke at the Fed. You'll see helicopters dropping money out of the sky, literally, first.
But the Japanese scenario of several years of slow-growth, semi-recession, is entirely plausible.
On the one hand Bernanke seems to be striving mightily to avoid the big Japanese mistake of keeping gazzillions of dollars (well, yen) of bad debts festering like a growing tumor in the banking system, destroying the banks' ability to lend and crippling the money-transmission mechanism. That's good.
OTOH, if a universal deleveraging occurs not only in the financial system but also among consumers who finally realize that their asset wealth can go down as well as up -- so everyone actually starts saving for real again -- then the ever-rising consumer demand that's driven the economy for a generation will disappear.
The US generally has under-saved, over-consumed and over-imported for years, driving up the trade deficit, etc.
A switch to increased saving, from importing to exporting, etc., is devoutly to be wished for -- especially with the cost tsunami of the Medicare/SS boomer retirement flood coming. It would be a good thing on net in the end.
But the period of adjustment could be rather uncomfortable and last for years. (Japan went into its slump with a lot more savings than we have).
OR this whole business could pass like the Great Stock Market Crash of 1987, the biggest market crash of all time. I remember it well, sitting there watching and wondering, and having no idea what was going to happen next. A good number of people thought that was the beginning of the end of the world -- but it turned out to be a whole lot of 'nuthin.
As to "WWII ended the Depression", I'm in the camp that says that's largely a myth. Looking at measures of consumer welfare during the war, objectively they were worse than during the 1930s.
The huge difference was that morale rose immensely, because now the hardship psychologically was considered to be not due to a 10-year slump but to volunatry shared common sacrifice to defeat the treacherous Jap and evil Nazi Hun.
And yes, the economic numbers did then start looking a lot better on the production end -- but
not on the consumption end that determines welfare.
I mean, we could draft five million people into the military and see the unemployment rate plunge today -- but that's sort of the Oceania v Eurasia economic cure.
"We also don't know the bailout will work. We could end up back in the Great Depression anyway."
Parts of the New Deal may very well have prolonged the Depression, so to say we could end up in a Depression "in spite" of a bailout is ignoring the fact that it may be the catalyst for one.
It just boggles my mind that so many people hold civil liberties more sacred than other liberties. In the face of a threat such as terrorism, real no doubt, and from the vantage of a singular cataclysmic disaster, it would seem engaging us towards oblivion, our civil liberties were not worth sacrificing, no matter how great the perceived threat. But after a financial cataclysm, our economic liberties are trivial enough, even ripe for the slaughter, that they might be sacrificed to keep us safe from this new perceived threat. And the possibility of a bank run is no more or less real than that of another plane crashing into a building full of people.
I happen to hold all our liberties sacred - civil and economic. And I don't think the desire to keep the government out of banking or insurance is tawdry compared to the noble cause of keeping them from tapping our phones.
Looking at measures of consumer welfare during the war, objectively they were worse than during the 1930s.
Most people are risk averse. During the Depression, broad swaths of the population faced the risk of abrupt and durable impoverishment. That threat largely evaporated after 1941. In a full employment economy, people were much more secure even though rationing made aspects of daily life a vexatious struggle.
Parts of the New Deal may very well have prolonged the Depression, so to say we could end up in a Depression "in spite" of a bailout is ignoring the fact that it may be the catalyst for one.
I suspect economists would generally argue that price supports and the formation of cartels in agriculture and industry (as promoted by the Agricultural Adjustment Act and the National Industrial Recovery Act), the imposition of payroll taxes to finance Social Security, and the promotion of a certain type of trade unionism by the Wagner Act did retard economic recovery. It is difficult to see how a mess of policy measures adopted in 1933-35 could 'catalyze' and economic contraction which began in 1929; it is also difficult to see what relevance such measures have to the current situation, as these acts had their impact on the real economy, not the financial sector. The same set of economists would generally argue that otiose monetary authorities bear much of the blame for the severity of the contraction after 1929.
Holy cow, and this is what the Atlantic Monthly's "economics correspondent" has to offer?
"My basic reasoning is this: given just how badly the Great Depression sucked, I'm willing to gamble on stopping it, even if that gamble fails, even if it is not necessary (a question that, if we actually go through with it, will be much argued and never answered)."
That's not "reasoning," that's an exposed nerve ending. Atlantic Monthly, find someone who knows what the hell she is talking about!
Wow, there is a lot of commentary that runs counter to everything I have ever learned about business cycles, the Great Depression, WWII, and Keynesian economics.
The Great Depression went from being a recession to a prolonged depression because of efforts to stimulate demand and prop up prices, both government actions. Thanks to FDR, hardly anyone sees it that way because the government was so actively trying to "do something" about it that they overlook this basic fact. Obviously his legacy has been long-lasting, since Bush and everyone else seems to be following this script.
WWII was a period of privation and diminished welfare. To say it ended the Depression is laughable on its face. Price controls and rationing made it a hard life indeed. What's more, the extension of many such controls after the war is largely responsible for the problems once it was over.
My dad owned a jazz club the fall of 1941. Business was so great he could afford to buy a new Cadillac every week if he wanted to. Once the Japanese bombed Pearl Harbor gas rationing went into effect and his club died, since no one would spend their valuable coupons driving out to his club, which was in the country. Later, when he moved to the Chicago area for a job, he had to commute from Wisconsin because no one would rent him an apartment in downtown Chicago. He had 3 young children, and people would rather rent a multi-bedroom apartment to a single old lady than a young family, since they were prohibited from charging what the market would bear.
The problem with the Keynesian approach is the assumption that this downturn was caused by a reduction in aggregate demand. The Paradox of Thrift and all that. Unfortunately for Keynes and his disciples (especially in Congress), Frederic Bastiat debunked this BS back in 1850 in "That Which is Seen, and That Which is Not Seen."
We probably can't avoid a painful recession, but we can avoid prolonging it with government attempts to keep interest rates artificially low and housing prices artificially high.
The Great Depression went from being a recession to a prolonged depression because of efforts to stimulate demand and prop up prices, both government actions. Thanks to FDR, hardly anyone sees it that way because the government was so actively trying to "do something" about it that they overlook this basic fact.
Once more with feeling. The economic contraction began in the summer of 1929 and came to an end in the spring of 1933. None of it can be attributed to ill-considered policies of the Roosevelt administration. That administration was not yet in office. It is arguably true that the economy would have recovered more rapidly during the period from 1933-41 without the NRA, and farm price supports, but recover it did. However, the administration also took the United States off the gold standard, stopped a banking panic dead in its tracks in March 1933, and, Bastiat my foot, stimulated the economy with public spending. These things did a world of good. These were policy measures the previous administration and Congress had refused to enact.
Anecdote warning etc, but most of the people at my office have been quite vocal that they'd rather see us go into another depression than have a dime of their money go to help investment bankers. The visceral hatred for bailing out the wealthy is quite noticable in rural areas, regardless of the potential risk by not doing so.
My grandfather still has stories of trapping skunks because they could get a small remittance on the pelts to help make ends meet. This, even though his folks actually had access to enough water to irrigate a small farm plot and thus were not starving.
I'm sure a few years of survival in that fashion beats gainful employment at the office. Tell your coworkers to start stockpiling noseplugs and tomato juice, they might need them while they're teaching The Great Evil Other that valuable lesson.
"stopped a banking panic dead in its tracks in March 1933"
FDR stopped a banking panic by essentially stopping banking.
Not to let Hoover off the hook, since he contributed to the economic collapse with his policies.
Re: WWII was a period of privation and diminished welfare. To say it ended the Depression is laughable on its face.
Then what did end the Depression for crying out loud? Why weren't we still in a Depression after the war? I can entertain an argument that FDR's policies in the 1930s may have hampered the recovery, I cannot entertain an argument that *nothing* ended the Depression because end it did.
Re: The economic contraction began in the summer of 1929 and came to an end in the spring of 1933.
I've noticed a trend on rightwing sites-- they are actually dating the Depression to 1933! This is lying on a scale generally seen only among Holocaust deniers and the few remaining groupies of Jeff Davis and the CSA.
You are willing to gamble that an ex-CEO of GS is going to use a trillion bucks in an ethical manner to alleviate a situation that, three months ago, he said would never come to pass. He can't even tell us what he's going to do with money.
Get some balls, would you? Bleeding heart liberals make me sick. No coincidence that the Dems are the ones supporting Plan 'P'. A Democrat has never seen a dole it didn't like.
The schmucks who created this mess need to feel some real pain. Something not too far short of crucifixion. Maybe the rack.
Not to say the dumb Murkans who believed housing prices would rise forever are blameless. But they can feel some pain too. We all need to take our medicine. I don't see why Paulsonstein gets to bail out his buddies.
"Looking at measures of consumer welfare during the war, objectively they were worse than during the 1930s..."
Most people are risk averse. During the Depression, broad swaths of the population faced the risk of abrupt and durable impoverishment. That threat largely evaporated after 1941.
That is of course fully discounting the risk of abrupt death or dismemberment to yourself or a family member, as was visited upon more than 900,000 via combat casualties after 1941.
Shooting that many people reduced the unemployment rate by about 2 points right there.
But I've already granted your point, yes it did improve morale.
The Great Depression went from being a recession to a prolonged depression because of efforts to stimulate demand and prop up prices, both government actions.
The Recession of '30, comparable to that of '21 which nobody remembers, became the Great Collapse when in 1932, in the face of ongoing recession and deflation, the Fed raised interest rates from 1.5% to 3.5% -- that is, by 133% -- to stop a gold outflow, under the rules of the Gold Standard. The money supply immediately collapsed as never seen before or since. What modern econometric models say was a strong recovery then starting up was then turned into the great collapse. Thank you, Federal Reserve and gold standard.
That sort of interest rate hike would be viewed today as suicidal insanity, something you'll never, ever see. (Imagine Bernanke raising the interest rate from 2% to 5% this week to stabilize the international situation.) People who imagine that "if only we were on the gold standard everything would be better" are nuts.
Now, "efforts to stimulate demand and prop up prices" are opposing policies, good and bad in a serious recession.
FDR -- who had nothing to do with the collapse up to 1932, obviously -- did both, because nobody back then knew what the hell they were doing, as the Fed had shown (it was still in large part operating on the Real Bills doctrine!)
FDR was just shoveling stuff up against the wall to see what would stick. He got the US off the gold standard, which increased demand and finally stopped all the bank runs etc., and was quite good.
He also tried to push up prices through creating cartels, minimum prices, etc., which was very bad (except for those getting the higher prices). That too looks nuts today, they did it because they figured if deflation was so damaging then forced price increases logically would be an antidote (plus for political reasons, of course - - the cartels, big corporations and labor unions loved it).
Keynes famously had a meeting with the supposedly "Keynesian" FDR economic brain trust behind all that and left saying, "I am not a Keynesian". The modern consensus is that all those price-raising efforts significantly slowed the recovery. So to the extent that one judges the Depression to be Great by the length of its slow recovery rather than by its depth -- but only to the extent one does that -- a good amount of blame for it can be dropped on FDR and his people.
Thanks to FDR, hardly anyone sees it that way because the government was so actively trying to "do something"
Well, the rooster on the spot always gets the credit for the sun rising. Who else will?
Regarding which, an interesting what if:
In the 1920s the Democrats tried hard to get the hugely popular and highly esteemed (especially by Keynes!) Herbert Hoover to be their presidential candidate. (Even FDR was for him!) If they'd succeeded, the Depression would've happened on their watch, the Repubs would have fully taken over in 1932, and the political-economic alignments would've been reversed for the next 40 years. Hmmm...
It is my understanding that Government intervention actually lengthened and deepened the Great Depression.
We never learn.
And by the way, Congress is largely responsible for this mess. They started FNMA, encouraged it and refused to regulate it sufficiently. FNMA interfered with the free market workings of the mortgage market.
I've noticed a trend on rightwing sites-- they are actually dating the Depression to 1933! This is lying on a scale generally seen only among Holocaust deniers and the few remaining groupies of Jeff Davis and the CSA.
You are confused and I am not lying. There were two periods of economic contraction, one from 1929 to 1933 and one during 1937-38. The economy expanded from 1933 to 1937 and from 1938 to 1945. The country was producing far below capacity in 1933 and a quarter of the work force was idle. Per capita income returned to 1929 levels in 1940, but elevated unemployment levels remained until 1942/43. IIRC, the rate of unemployment was an average of around 17% during the eleven year period in quesiton.
That is of course fully discounting the risk of abrupt death or dismemberment to yourself or a family member, as was visited upon more than 900,000 via combat casualties after 1941.
I believe the number of people in combat positions never exceeded 4 million at any one time, or
FDR stopped a banking panic by essentially stopping banking.
For a period of one week while examiners employed by the Comptroller of the Currency went to work. That and subsequent legislation left us free of financial panics for more than four decades.
Then what did end the Depression for crying out loud? Why weren't we still in a Depression after the war?
Why aren't we still in the recessions of 1982 or 1991? You don't need somebody "to end" a recession. Over time the economy naturally grows back up to its long-term growth track on its own.
The economy was most of the way back by 1940 (in spite of all the screw-ups by the Fed, FDR and everyone else that had slowed its recovery -- making it the slowest recovery from the Depression in the world).
But the later economic numbers for the WWII years can only be looked at as a break in the series -- they don't make sense by "normal" measures, aren't comparable to either before or after.
With wage-and-price controls, rationing, effective government control over major industries, etc., it was the closest to a "command economy" the US has ever known. The data just isn't comparable to the regular market economies of before and after.
Measures of consumer welfare -- including violent deaths -- were much worse than during the late 1930s, but morale was higher. Command economies are not generally associated with consumer welfare, but maybe morale went up during the early days of the Oceania v Eurasia conflict too.
In any event, the big impact of WWII on the "normal" economy wasn't the start of the war ending the depression, it was the *end* of the war fueling a consumer boom.
For half a decade the economy hadn't produced any cars or other normal consumer goods -- then all of a sudden there were millions of people ready to spend all that pay they hadn't been able to spend during all those years that they'd put into war bonds, all at once ready and hungry to buy all that stuff...
It is my understanding that Government intervention actually lengthened and deepened the Great Depression. We never learn.
Never learn what? The salient period for the 'deepening' of the Depression extended from November 1930 to March of 1933. That is the period during which north of a third of the banks in the United States failed. The government maintained its existing monetary regime and liquidated failed banks in accordance with the legislation of the day. There was little or nothing significant in the realm of novel goverment intervention until the erection of the Reconstruction Fianace Corporation in mid-1932, at which point the economy had seen near the worst of it.
The economy was most of the way back by 1940 (in spite of all the screw-ups by the Fed, FDR and everyone else that had slowed its recovery -- making it the slowest recovery from the Depression in the world).
The economic contraction in North America (and, as I recall, the southern cone of South America, then among the world's affluent countries) was much more severe than that which had occurred in Europe, with production levels falling by more than 30%. In Europe, the size of the contraction varied - Germany and Austria saw a 20% contraction, Ireland and Greece a small expansion, the remainder being in between. There was a good deal more ground to recover.
For half a decade the economy hadn't produced any cars or other normal consumer goods
IIRC, 43% of domestic product was devoted to the military during that period; which is to say that 57% was not. My mother does recall eating during the war; no, she was not living on K-rations.
Re the period between 1929 and 1933: there's some guy called Milton Friedman. Seems he wrote a highly-acclaimed book about that period. Its conclusion: fed policy, fed policy, fed policy.
But if you want to keep blaming free markets and believing that the government/tooth fairy can spend us into prosperity, Art Deco, go ahead.
Moving close to the present, I was wondering if Megan or someone else who understands economics could explain what happened in Japan in the 1990s.
It seems somewhat relevant right now, probably more so than arguing about FDR.
What's more, the extension of many such controls after the war is largely responsible for the problems once it was over.
Rent controls instituted in 1942 (and long retained) have distorted and disfigured the housing market in New York City. The do not affect the 97% of the population which does not live under them. Cartels and price controls in the transportation sector were erected prior to the war, as were the elaborate system of subsidies and production controls in agriculture. The Nixon admnistration's experiment with wage and price controls was not an extension of war time practice and did not survive more than about two years outside of the traffic in fuel.
From everything I've learned from my professors, and read in papers, the bank failures from 1930-Spring 1933 were really not fundamentally different from the bank failures that happened throughout the 20s. That is, weak, small, rural banks with low profit margins and little diversification in assets died because they couldn't hack it, especially during an economic downturn. Branching restrictions forced banks to stay small and local, meaning they were more susceptible to weaknesses in the local economies. Though the Comptroller of Currency dropped some branching restrictions in the early 20s, several states did not. So many big banks got bigger, and many small ones were hamstrung, further weakening them. Meanwhile the widespread use of the automobile allowed customers to shop around a bit more than they could previously. It was a shakeout, much as this could turn out to be, if the government were to stay out of it.
Attachment to the gold standard actually kept contagion for the most part at bay. It was after FDR took the nation off the gold standard once in office that 4,000 banks failed, as compared to the average of 1,700 a year between 1929 and 1932, most of which were not during the most panicked months.
Rent controls instituted in 1942 (and long retained) have distorted and disfigured the housing market in New York City. The do not affect the 97% of the population which does not live under them. Cartels and price controls in the transportation sector were erected prior to the war, as were the elaborate system of subsidies and production controls in agriculture.
I didn't say that price controls and cartels only existed during the war, I'm saying that they existed within and around the war period, always causing problems. And as my anecdote about my dad illustrates, NYC wasn't the only area with rent control, though it is remarkable in its dedication to it for so many years afterwards.
Yes, controls existed before the war, that's part of why so many people here are remarking about FDR's backwards Depression policies. Yes, they existed for a few years after the war, that's why we had problems into the post-war period, and have the legacy of employer-based health insurance. It was a way around wage ceilings in place after the war.
What are you arguing here? That the government's economic policies were mostly beneficial, or at least not harmful, during this extended period? Because of this we shouldn't fear the government trying again now?
Art Deco keeps pointing to GDP and wages as an indicators of economic wellbeing during the Depression. To me this seems incomplete given that GDP going up only shows that there was work being done, but doesn't indicate what work wasn't being done instead due to the make-work programs of the Depression. Classic Broken Window Fallacy. Bastiat is our friend. Get to know him.
In addition, it's been already discussed the massive deflation that occurred and the attempts to prop up wages though minimum wage legislation, jobs programs, etc. So wages aren't really a good indicator of wellbeing, given that prices weren't really allowed to go where they would naturally. Indeed, though minimum wage institution certainly helped out lots of white folks, particularly union members, it was hell on blacks and Puerto Ricans, since they simply weren't getting jobs at those prices. I'd hardly call that a positive effect.
OK, one more and I go to bed.
I'm not only hating on Roosevelt here. Obviously Hoover deserves much of the blame, for he was an interventionist too. Like the precursor of Bush! And my fear is that Obama (because he's got this one in the bag, unless he makes some huge gaffe) will be another FDR.
Regarding the Japanese recession: my understanding is that they were dealing with a liquidity trap, largely thanks to keeping their interest rates too low. But then I don't know as much about that situation and am open to being schooled in the matter.
Re the period between 1929 and 1933: there's some guy called Milton Friedman. Seems he wrote a highly-acclaimed book about that period. Its conclusion: fed policy, fed policy, fed policy.
But if you want to keep blaming free markets and believing that the government/tooth fairy can spend us into prosperity, Art Deco, go ahead.
I never made reference to 'free markets'. I did refer to the extant regime in monetary policy and banking regulation - the gold standard and passivity in the face of bank failures. These policies were abandoned in March 1933 to immediate good effect. They were abandoned in Britain in September 1931 to good effect as well.
The federal authorities have been successfully making use of fiscal and monetary policies to limit the severity of business cycles for some 75 years now. Sorry to disappoint M. Bastiat.
the bank failures from 1930-Spring 1933 were really not fundamentally different from the bank failures that happened throughout the 20s.
The number of bank failures and the losses to depositors in the first year after the crash (November 1929 to October 1930) were elevated but not unprecedented, about equal to what had been the case in 1926. Beginning in November 1930, failure rates and destruction of checkable deposits went off the charts. The money supply contracted by a third, people's propensity to hold real balances nearly doubled, prices declined by a third, and real interest rates were in the double digits.
Attachment to the gold standard actually kept contagion for the most part at bay. It was after FDR took the nation off the gold standard once in office that 4,000 banks failed, as compared to the average of 1,700 a year between 1929 and 1932, most of which were not during the most panicked months.
The 4,000 banks to which you are referring failed during the banking crisis which erupted at the end of 1932, before the United States went off the gold standard. Here is a link:
http://www.fdic.gov/bank/historical/managing/Chron/pre-fdic/index.html
Both the British and American economies began to recover within months of abandoning the gold standard, the former in September 1931, the latter in March of 1933. There is a reason Sir Alan Walters, hardly an agrarian populist, amiably referred to advocates of a re-instuted gold standard as 'crackers'.
Art Deco keeps pointing to GDP and wages as an indicators of economic wellbeing during the Depression. To me this seems incomplete given that GDP going up only shows that there was work being done, but doesn't indicate what work wasn't being done instead due to the make-work programs of the Depression. Classic Broken Window Fallacy. Bastiat is our friend. Get to know him.
National income accountants are better friends than Bastiat.
"Attachment to the gold standard actually kept contagion for the most part at bay."
This is a very odd statement. The gold standard was the mechanism that transmitted the Depression around the entire world. (Just as the dollar-peg transmitted the Asian-Russian crisis in 1997.)
And it was the attempt to reinstate the gold standard at pre-WWI parities that no longer fit the real economies of the 1920s that caused the stress (deflation in Britain, excess gold flows into France, etc) in the international financial system that set it up to "blow". If there'd been no gold standard but floating rates, there could have been no world-wide Depression as we knew it.
Floating exchange rates have their own problems, but they don't transmit financial crises. _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, gives the comprehensive dope on this.
(Anna Schwartz, Friedman's co-author of the Monetary History, had a nice little paper on how the only significant western country to escape the brunt of the Depression was Spain, which was also the only one not on the gold standard.)
Also, again, it was the Fed's raising the interest rate two full points in 1932, in the midst of ongoing recession and deflation -- to stop a gold outflow! -- that killed the recovery that was trying to start and actually totally cratered the economy into the Depression. A big surge of bank failures followed that cratering the next year, in 1933 (4,000, as opposed to "only" 5,000 during the prior three years), after FDR was elected?.
Well, yeah.
BTW, you sound like you are anti-government intervention in the economy. Well, fixing your nation's international exchange rate is governmental price fixing, plain and simple, as is fixing your currency's domestic price to a commodity like gold. Reasons why Friedman was against the gold standard.
Obviously Hoover deserves much of the blame, for he was an interventionist too.
Forty percent of the banks in this country went under over a period of three years and the prevailing policy was to say 'so long'. A new Congress was elected in November 1930. He had the option under the constitutional provisions then in effect to summon it for a special session. He did nothing and Congress did not assemble until constitutionally scheduled to do so in December 1931. No meliorist legislation was passed for more than a year after the economy began to go over a cliff. This is intervention?
What are you arguing here? That the government's economic policies were mostly beneficial, or at least not harmful, during this extended period? Because of this we shouldn't fear the government trying again now?
What Milton Friedman, Alan Walters, and others have argued for a generation: that deflationary monetary policy (compounded some with protectionism and deflationary fiscal policy) turned a disagreeable business recession into an economic disaster; reversal of these policies generated a macroeconomic recovery, albeit one retarded by a number of other policies the government (being highly improvisational) was persuing at the time.
I think passivity in the face of a systemic financial crisis is inadvisable, and has proven disastrous in the past. Dr. Bernanke was a close student of financial panics in his academic work; I have a suspicion that few today understand better what the necessary medicine is.
"or that we'll end up back in the 12th century".
Actually the 12th century was a rather decent time. It was a period of rapid economic growth. A great many Gothic Cathedrals were built and many of Europe's cities were founded in that century. It was a period of global warming, but no one had the hubris to claim personal responsibilty. There was trouble in the Middle East, but there is always trouble there. And while they didn't have Sarah Palin they did have Eleanor of Acquitaine who also enjoyed hunting.
If this current failure brings back the 12th century I'm all for it.
I believe the number of people in combat positions never exceeded 4 million at any one time, or [??]
Military personnel jumped from 400,000 in 1940 to 1.8 million in 1941 then straight up to 12 million in 1945. Combat casualties were about 1,000,000: 300,000+ dead and 600,000+ wounded (tallies vary a bit according to who's counted).
The civilian labor force was a bit over 50 million in 1940, so numbers on this scale pretty much fully wipe out the conventional "unemployment rate" -- but without putting any of these millions of people into any productive peace-time market-type jobs, which is what the normal employment rate measures. So claims along the line of "the war eliminated unemployment", you know, gee.
As I said, the economic data for a command economy in wartime simply are not comparable to those for a peacetime market economy. It's a five-year break in the series.
IIRC, 43% of domestic product was devoted to the military during that period; which is to say that 57% was not. My mother does recall eating during the war; no, she was not living on K-rations.
Oh, all right, "wasn't any" was rhetorical, as I'd hope most people would understand, since even the Russians had some.
I never said civilians didn't eat (though food and clothing were certainly rationed). I did say not many bought new cars. Did your mother always treasure her 1944 Pontiac?
Try reducing civilian consumption on the order of 40% for five years, with the civilians saving a corresponding amount of their pay in war bonds, and see if you don't get some pent up demand at the end. That is the actual effect the war had on the real, peace-time market economy.
The economic contraction in North America (and, as I recall, the southern cone of South America, then among the world's affluent countries) was much more severe ... In Europe, the size of the contraction varied - Germany and Austria saw a 20% contraction,....
A 20% contraction is plenty severe, and their rate of recovery was a lot faster than ours, as was everybody else's.
A nice politically liberal source detailing the reasons why, and giving the bulk of the credit to New Deal policies favoring high wages, high-prices -- such as the NIRA act of 1933 that suspended anti-trust laws for 500 sectors of the economy, etc, etc. (one doesn't have to be a genius to see how "higher prices" translates into lower employment and slower growth) -- is _Lessons from the Great Depression: The Lionel Robbins Lectures_, by Peter Temin of MIT. Nice and accessible, if oldish.
There's been lots of academic follow-up since then, such as...
You know, the economy had to recover from the Depression at some rate, so the fact that it did doesn't automatically entitle the rooster sitting on the top of the henhouse at the time to any credit for it at all.
Obviously Hoover deserves much of the blame, for he was an interventionist too.
Poor Hoover, he didn't do a damned thing to cause the Depression but got blamed for it and all the "Hoovervilles" forever more, his name still a synonym for all such bad things to this day.
The unluckiest of presidents. It's no wonder he went to his grave after a long life still spitting oaths at the Fed.
An irony of it all was that Keynes thought very highly of Hoover, but thought rather little of FDR, at least in the 1930s as a manager of economic policy. His line after a meeting being: "I'd supposed the President was more literate, economically speaking."
Yet in popular history Hoover caused the Great Depression and FDR saved us all from it with his astute Keynesianism.
Go figure. Life ain't fair.
Bastiat my foot
Before we beat up too much on Bastiat, let's remember how right he was about one thing.
WHO SHOULD OVERSEE THE FIX and WHO SHOULD BE HEADING TO JAIL?
Too many have fed at the trough. What Fannie Mae and Freddie Mac executives did was illegal. Taking their cash favors was morally bankrupt.
http://pacificgatepost.blogspot.com/2008/09/fanny-mae-freddie-mac-congressional.html
Still no time to panic, but some executives and some in Congress should see jail time.
….AND, How about starting with all Senators who took cash from Fannie and Freddie?
I was (gasp) for the bailout and agreed with(gasp again) Bush. I am close to saying lets wait, and then watch this system crash. So we can finally put the Reagan legacy in the history books as the great failure that it always was. Let it trickle down the to those Rural folks who voted they guns. Bill Clinton was right This is the Biggest fairy tale I have ever seen. Just think if we left Clinton taxes alone. We wouldn't have the debt. The Dems should walk out and let the Republicans stew in the mess they created. What will happen the Dems would fix this Mess. Rescue the nation, and the uninformed Citizens would kick them out of office, because Yes, taxes will be raised. Someone has to pay for the home flippers. Geez. I am so freaking angry
If confidence-building is important, then the problem is not just money and policies but also people. The confidence of the markets is incompatible with that of the citizenry, as long as Paulson is the one responsible for distributing the money. Replace him and everyone else who cheered on the excesses of the past years with economists who warned where bad credit would get us. And then infuse the necessary amount of cash.
Re: You are confused and I am not lying.
I did not accuse you of lying and I am not confused. I pointed out a trend on some rightwing blogs where other folks have been dating the depression to 1933—I didn’t say you had done this.
Re: But the later economic numbers for the WWII years can only be looked at as a break in the series -- they don't make sense by "normal" measures, aren't comparable to either before or after.
Of course they were a “break”—a break that broke the US out of the pattern it had been in. You seem to be arguing that WWII happened in some alternate reality and that the normal laws of cause and effect were suspended so that nothing that happened in 1941-1945 had any effect on the future. This is idiocy of a rare order!
Either the New Deal ended the Great Depression or WWII did (or some combination thereof). Please pick one, because you have to—there are no other choices available in the timeline.
Thank-God I had the benefit of family who lived through all those years and transmitted their knowledge of them to me directly so that I am proof against historical revisionists who try to tell us that what happened didn’t really happen at all.
"Based on what I'm hearing from Wall Street, I'm pretty sure that something bad will happen if we let a whole bunch of banks fail. "
Are you considering the source of your information and evaluating it in that context? If I was on Wall Street, I'd be prophesying doom and destruction too. Isn't it in Wall Street's interest to stampede the rest of the country into handing them $700 B? If the government was considering shelling out $700 B for relief of middle aged men, you can bet that I'd be having a mid-life crisis right now.
Remember back when the most incendiary thing we had to talk about was how we weren't allowed to call Sarah Palin dumb?
What was that, like, six, seven years ago?
Large scale government interventions of the sort postulated here are EXACTLY what turns recessions and market corrections into depressions. The only thing of which we can be sure is that however bad things may go it will only be worse if we throw good money at bad debts.
The strongest argument sited by Megan is that we don't know what will happen but since the people who were too stupid to adhere to good banking practices think things may go badly if we don't help them out of their hole then we need to "do something". We will let the people who thought it a good idea to force banks to make these loans decide what that something will be.
Megan has already admitted she doesn't know if it will help or make things worse but hey, these guys have such a stunning track record we need to give them the benefit of the doubt. Right? The stakes are just too high for us not to believe them.
This is the type of argument that religious people use to support their wholy unsupportable mythologies. We don't know if Allah exists but boy would we be in sad shape if he does so let's all go buy burkas and stone each other just in case.
I have to say that it is this highly developed form of reasoning that gives the Atlantic brand its luster.
We don't know if doing nothing or doing something is the better plan, but let's give up our liberty and wealth because Paulson, Dodd, Bernanke, Bush and Frank think it's a good idea.
No thank you.
Also, I think it's unfair to cast opponents to a bailout as saying nothing bad will happen. They are saying something bad will happen no matter what, and this bill only makes it worse. It is the proponents of the bailout who make it seem as though this solves our problems.
Noah Yetter,
Like Herschels, I have some years of memory to call on.
The wartime deprivation and real rationing in the USA was over before the end of 1942. By then the US economy was expanding at the sort of rate the Chinese have managed recently - and it was more of a government-directed expansion than the Chinese have ever managed. The government-steered switch over to civilian production in 1945/6 was also pretty smooth. But unshackling from government meant slowing down a bit, not rocketing ahead.
The FINANCIAL and the SOCIAL are NOT disconnected. I'm sick of people trying to turn this into a "strictly financial matter". NOTHING is this simple. What is happening now and in all other past financial analysis in ALWAYS intertwined with SOCIAL and MORAL NORMS!!!!! ALWAYS ALWAYS ALWAYS!!! Sorry for all of you out there (the middle classes) who want the nasty taken out, who want to simplify this matter, who want the topic to include only scare tactics about 401ks and savings and mortgages. Guess what? The majority of the adult working population in the United States doesn’t have a 401K plan or saving or a house!@#$%^&* Your bosses have screwed you and now you seek to back them up because they’ve put all of your "things" in jeopardy. What about a fundamental change in social values to go along with the 700billion you’re stealing.....
Thank you for an exceptionally reasonable argument for supporting some form of large-scale intervention. Of course we do not know what will happen; this is entirely new territory. But the detailed economic arguments are beside the point. This bailout is all about psychology (as is 90% of economics). The financial markets have lost their nerve. Until they regain their confidence (and some of the underlying dysfunction is rooted out), they need to know that there is a someone with the authority and means to act decisively if needed. While it is very reasonable to look askance at any requests from the Bush Administration for such unrestricted authority, I think that is the essence of what Paulson has been trying to say: any plan that is too restricted will not be sufficiently reassuring.
Ideally, once a plan is passed, Paulson should be able to stick it in his drawer and that would be sufficient to stabilize the markets. Unfortunately, the political pressure to start shoveling out funds will be absolutely enormous. (Just picture, among many others, the parade of Congressional delegations to the Treasury as each state's pension fund comes under pressure in the market.) Whatever plan is passed, refusal to actually execute a significant portion of it will be politically untenable and will undermine the confidence it is intended to restore. I am afraid that a wait-and-see approach is not possible either before or after a plan is passed.
Incidentally, this is the same argument I give to my conservative friends who question the value of trying to aggressively combat global warming. Yes, the science is still immature, and we do not fully understand how much of what is happening is being driven by human activity, how the underlying mechanisms work, or what the most likely consequences will be if we do not act (or what may happen even if we do). But given that we have a pretty good idea of how drastically and rapidly the climate has shifted in previous eras and how non-linear the process can be, the potential downside (a catastrophic collapse of large portions of the biosphere over the course of a couple of decades) is so enormous and horrifying as to demand that we assume the worst and act (possibly overreact) aggressively.
Megan -
That makes sense IF you assume
1 - That a 2nd great depression is a realalistic possibility absent further massive and foolish large scale government intervention
and
2 - That the intervention isn't going to make things worse.
Both of those are questionable statements. The "gamble on stopping it", may make it more likely, if not in the short run, then in the future.
And if the intervention is particularly foolish (as was a lot of the intervention that caused the great depression to be a real great depression rather than just a severe recession), you even make it more likely in the short run.
Well, color me surprised that my favorite professor was wrong about the bank failures of 1929-1933. I guess that'll learn me.
Regarding the gold standard in general vs a floating currency, I've read a lot of conflicting stuff about this. My understanding is that the biggest advantage of the commodity-backed currency is that it resists being debased by sitting regimes more than fiat currency. Obviously its inflexibility is a problem, and certainly inflation wasn't the problem during the Depression, but isn't it a more common monetary phenomenon than deflation?
As to Hoover, the most appalling action of his presidency was that he passed the Smoot-Hawley tariff. I don't blame him for the contraction of the money supply, but the Fed sure as hell didn't sign that bill into law.
National income accountants are better friends than Bastiat.
What does this mean? If you could prove Bastiat wrong I'd love to read it.
Art Deco - The economy, over the whole period from the begining of 33 until 41 went up, but not over ever part of that time period, or even every part but 1937-38.
---
Perhaps the most radical aspect of the New Deal was the National Industrial Recovery Act (NIRA), passed in June 1933, which created a massive new bureaucracy called the National Recovery Administration. Under the NRA, most manufacturing industries were suddenly forced into government-mandated cartels. Codes that regulated prices and terms of sale briefly transformed much of the American economy into a fascist-style arrangement, while the NRA was financed by new taxes on the very industries it controlled. Some economists have estimated that the NRA boosted the cost of doing business by an average of 40 percent — not something a depressed economy needed for recovery.
The economic impact of the NRA was immediate and powerful. In the five months leading up to the act’s passage, signs of recovery were evident: factory employment and payrolls had increased by 23 and 35 percent, respectively. Then came the NRA, shortening hours of work, raising wages arbitrarily, and imposing other new costs on enterprise. In the six months after the law took effect, industrial production dropped 25 percent. Benjamin M. Anderson writes, "NRA was not a revival measure. It was an antirevival measure . . . . Through the whole of the NRA period industrial production did not rise as high as it had been in July 1933, before NRA came in."
http://www.mackinac.org/article.aspx?ID=4031
Also the later 37-38 contraction also has connections to government interventions, as does the earlier period under Hoover, who falsely gets criticized for not doing anything about the depression but who actually was highly interventionist.
Poor Hoover, he didn't do a damned thing to cause the Depression but got blamed for it and all the "Hoovervilles" forever more, his name still a synonym for all such bad things to this day.
Again, the Fed is formally independent but generally deferential to the Administration in office. If I am not mistaken, the dollar-gold parity was a matter of statutory legislation, not Fed policy, and remained in effect for 18 months after Britain had abandoned their's. The regulation of national banks was vested in the Comptroller of the Currency, an official of the Treasury, not the Federal Reserve governors. Mr. Hoover also put his signature on the Smoot-Hawley tariff and pressed Congress for a tax increase in 1932. He bears considerable blame.
as does the earlier period under Hoover, who falsely gets criticized for not doing anything about the depression but who actually was highly interventionist.
So characterized, but without specifics. The notable contrivance sponsored by Mr. Hoover was the Reconstruction Finance Corporation, which was erected in 1932, after the economy had rolled about two-thirds of the way down hill. The Hoover administration (in 1932) and the Roosevelt administration (in 1937) sponsored contractionary fiscal policies in accordance with prevailing orthodoxies concerning balanced budgets. The thing is, you can elect to maintain, increase, or decrease public sector borrowing. Each will have implications for the macroeconomy. In the realm of fiscal policy, it is the implications that matter, not some jesuitical distinction between 'interventionist' and 'non-interventionist' courses of action.
Art Deco - In addition the the RFC, Hoover signed Smoot-Hawley, raised income taxes, pressured employers to keep wages up, and that's not a full list of how he intervened.
FDR caused the recession of 1929-32 to last until 1942 by passing laws that boosted wages and salaries and restrcted capital formation.
Had he done nothing, prosperity would have returned by 1934.
In the 1960s DeGaulle replaced 100 old French Francs with 1 New Franc. This was a massive contraction of the money supply. However all prices and all contracts were ammended by law so that everything was worth 1/100th of what is was worth the minute before the law went into effect.
Uhe US had suffered 13 panics before 1929. Recobery was always prompt and growth was restored. However, the Federal Reserve did not exist when the 13 panics occurred. In 1932 it committed the colosal blunder of cutting the money supply by 1/3rd.
If all prices and contracts had simultaneously been adjusted, the recovery of 1932 would have continued. However, FDR tried to keep wages at 1929 levels while manufacturers were forced to sell at much lower 1933 prices. Unable to make a profit they went belly up.
When the war began the fed inflated the money supply. Prices rose high enough so that manufacturers could afford to pay 1929 wages and prosperity returned.
Keynsians misinterpretted this event and concluded that increased government spending end the depression. Communists concluded that capitalism periodically self-destructs (which is true) and ca only be save by war (which is false - war is the enemy of capitalism).
Historically speaking - capitalism periodically self destructs. This is called the business cycle of Boom and Bust.
We should do nothing about the current economic mess. No bailout. No regulation. Let the financial blood flow on Wall Street. Let whatever will collapse. If we do nothing it will happen at the speed of business. And from the ashes a new business leadership will rise up (like the Phoenix) and American business will be reborn. The old guard will be sent to Vahalla and the new guard will make America more prosperous -- just as new guards have created progress and prosperity since the Pilgrims first arrived in America.
If we intervene to prevent the crash or mitigate it we will only keep the old guard in power and prevent them from getting their well deserved rewards.
If we are really successful in preventing the crash we will re-create the Soviet Economy under Gorbachev or the Cuban economy under Castro.
In the 1960s DeGaulle replaced 100 old French Francs with 1 New Franc. This was a massive contraction of the money supply. However all prices and all contracts were ammended by law so that everything was worth 1/100th of what is was worth the minute before the law went into effect.
That is not a contraction in the money supply, that is a renominating of the existing money supply.
Uhe US had suffered 13 panics before 1929. Recobery was always prompt and growth was restored. However, the Federal Reserve did not exist when the 13 panics occurred. In 1932 it committed the colosal blunder of cutting the money supply by 1/3rd.
There was a prolonged economic slump during the years running from 1837 to 1942 and another during the period running from 1873 to 1880. The Federal Reserve was in existence during the 1921-22 recession. The contraction of the money supply after October 1929 occurred over a period of three and a half years as a consequence of the bank failures, not some abrupt diktat from the Fed.
FDR caused the recession of 1929-32 to last until 1942 by passing laws that boosted wages and salaries and restrcted capital formation. Had he done nothing, prosperity would have returned by 1934.
The economy began its recovery in 1933. Doing nothing was government policy from October 1929 to January 1932. Fat lot of good it did.
If all prices and contracts had simultaneously been adjusted, the recovery of 1932 would have continued. However, FDR tried to keep wages at 1929 levels while manufacturers were forced to sell at much lower 1933 prices. Unable to make a profit they went belly up.
There was no economic recovery in 1932, merely a decline in the rate of economic contraction. There was considerable excess capacity in the economy in the fall of 1936, but incomes and employment were considerably higher than they had been four years earlier.
If we intervene to prevent the crash or mitigate it we will only keep the old guard in power and prevent them from getting their well deserved rewards. If we are really successful in preventing the crash we will re-create the Soviet Economy under Gorbachev or the Cuban economy under Castro.
Be generous and pass that bong to the person sitting next to you.
Art Deco - In addition the the RFC, Hoover signed Smoot-Hawley, raised income taxes, pressured employers to keep wages up, and that's not a full list of how he intervened.
Presidential jawboning is likely to have about as much effect on industrial wages as whistling Dixie (as Jimmy Carter and his 'Special Counselor for Inflation' Robert Strauss were later to discover).
The fiscal policies followed by the Administration (which I have made several references to which you did not read) were deletarious. Again, any fiscal policy has implications. They cannot be categorized as 'interventionist' or 'non-interventionist'. If anything, fixating on balancing government accounts (as was done in 1932 and 1937) is the more 'non-interventionist' because the eye is not on the ball of economic performance. As for 'Smoot-Hawley', the initiative for same came from Congress and it was passed before the series of banking crises began and during an interlude when it appeared that an ordinary business recession was underway. There was nothing novel about tariff legislation, and comparatively high tariffs had been the default view within the Republican Party from its formation in 1854 and within the Whig and National Republican Parties prior to that.
Presidential jawboning is likely to have about as much effect on industrial wages as whistling Dixie
Often yes, but not when there is some serious potential threat of more control behind it. And the increased income taxes, increased tariffs, etc. do qualify as increaseing government intervention in the economy (as does the greatly increased spending and other smaller factors)
The fact that the Republican Part had long supported high tariffs is irrelevant. That fact doesn't make a large increase in them anything other than a very damaging intervention in the economy. And yes support was strong in the congress but as long as Hoover signed the bill (and he did) he shares responsibility.
If you somehow really want to absolve him of that responsibility, well I disagree, but it isn't my main point anyway. The point is about government actions at that time causing problems, not picking a list of individuals to blame.
That fact doesn't make a large increase in them anything other than a very damaging intervention in the economy.
I believe the ratio of the mean of imports and exports to domestic product was, in 1929, about .05. Britain and Canada had economies heavily dependent on foreign trade. The United States produced (for the most part) for its domestic market. IIRC, the volume of foreign trade fell by about half in the succeeding four years. The deadweight loss to the American economy consisted of the loss of welfare from relying on less efficient domestic producers and the costs incurred in making the transition from one to the other. These are real costs and Smoot-Hawley was bad policy. Given the small share of the economy engaged in imports and exports, losses associated with falling international trade were surely a modest fraction (5-10% or therabouts) of the economic implosion, which amounted to a 30% decline in production.
Often yes, but not when there is some serious potential threat of more control behind it. And the increased income taxes, increased tariffs, etc. do qualify as increaseing government intervention in the economy (as does the greatly increased spending and other smaller factors)...The point is about government actions at that time causing problems, not picking a list of individuals to blame.
Federal regulation of wages and hours outside of the conventional boundaries of interstate commerce (e.g. the transportation sector) would have been quite a novelty in 1930. Also, the federal Supreme Court was quite unrestrained in invalidating economic and social legislation during the period running from 1933 to 1937, including the National Recovery Act. I doubt there was much of a threat.
I will re-state one simple concept that you refuse to acknowledge: in the realm of public sector borrowing, taxation, and the regulation of the money supply, the distinction between 'intervention' and 'non-intervention' is factitious. The only thing that might have qualified as 'non-interventionist' in that circumstance would have been absolutely fixed public policies persued without regard to economic circumstances. The government did just that in one aspect of its mix of economic policies: the maintenance of the gold standard. It was that policy which proved disastrous.
"Skywriting" indeed, Megan, populist skywriting. If the corporate greed of Wall Street and the insouciant and unimaginative complacency of regulators have brought the American economy to the brink, it will be the "moral outrage" of obscurantist democratic populism that will push the economy over the abyss.
During the next decade whilst we are all experiencing the human failings of the capitalist system, we have to create new political and economic systems. This is more important today than the 1930s as we are moving towards a brick wall, the depletion of the world's natural resources to preserve the human experience. But we must make sure that these new systems are devised by 'independent' thinkers and not either government or big business. This is the most important thing that we must learn as without ‘independent’ thought, we are left with vested-interests one way or another. For otherwise we shall not get another chance after this time to preserve human life.
Dr David Hill
World Innovation Foundation (WIFC)
Bern, Switzerland
Art - If you lose 2.5% of economic activity (using your stats of 5% of GDP for trade and 50% of trade lost), relatively quickly in a trade war you also get the indirect effect from people who did business with those who relied on international trade losing business and a general shock and drop in confidence.
Federal regulation of wages and hours outside of the conventional boundaries of interstate commerce (e.g. the transportation sector) would have been quite a novelty in 1930. Also, the federal Supreme Court was quite unrestrained in invalidating economic and social legislation during the period running from 1933 to 1937, including the National Recovery Act. I doubt there was much of a threat.
It would have been new, but things where moving in that direction. The NRA was tossed out, but not before it went in to effect. Tossing it out later, didn't keep it from doing harm. Even just the "jawboning" itself would have some very modest negative effect, esp. to the extent it reflected the general viewpoint that cutting wages was bad. Later under FDR you had more than just jawboning, you had regulation of wages and prices.
in the realm of public sector borrowing, taxation, and the regulation of the money supply, the distinction between 'intervention' and 'non-intervention' is factitious.
In monetary policy, there always is some sort of intervention, so you have a bit of a point. But sharp changes, flooding the economy with money, or harshly and massively contracting the money supply could still be considered more interventionist.
In taxation and spending policy, your simply wrong. Increasing taxes, increasing spending, increasing targeting of taxes or tax breaks, all are directly becoming more interventionist. Decreasing taxes and spending, or simplifying taxes, is becoming less interventionist.
YES, Noah Yetter - thank you, you are right.
Government tinkering didn't help then won't help now.
"What ended the Depression was the END of WWII, when we finally unshackled the economy and let it work again."