Some weeks ago, I spelled out why the much-maligned "supply side" economics are in fact very beneficial to--well, most people, as evidenced by the booms of the '20s, '80s, and so on. Of course, the obvious liberal comeback would be "yeah, but after the Roaring Twenties, there was a Great Depression!"
The implication, of course, being that conservative economic policies may cause a short-term boom, but in the end they always screw you over, because greed and overspeculation cause market crashes and so on and so on. Sounds plausible enough on the surface, I guess, but only because people don't spend a lot of time picking it apart. Several good writer-historians--Amity Shlaes' The Forgotten Man, for one, Burton Folsom's New Deal or Raw Deal?, for another--have done a good job in recent years of condensing the economics and fiscal issues involved, however, and the events of the 1920s and '30s are much easier to understand now.
So with that in mind, let's take a look at the beginnings of the Great Depression, by exploding some popular myths associated with it. For example:
1. The Wall Street crash caused the Depression.
Well, it certainly didn't help anything, but in the immediate aftermath of 1929's "Black Tuesday," no one seemed to regard the crash as a big deal. Neither the government, nor the media, nor the business leaders, all of whom regarded it as a momentary fluke irrelevant to the national economy. Maybe a lot of wealth had been lost on paper, in stock certificates and the like, but contrary to what liberals later claimed, that was not the only kind of wealth being generated in the '20s. Consumer goods and utilities had expanded drastically during the decade, and even after the crash, every economic indicator suggested that as remote parts of the country were electrified, introduced to cars, etc., this ongoing wealth-production would inevitably drive stocks back up. Which might well have happened within a year or so, except....
2. Herbert Hoover was a "rugged individualism" laissez-faire guy.
....the POTUS just couldn't stay out of things. (Sound familiar?) It's true, Hoover was a self-made man who made his wealth in the private sector, he did believe in the necessity of individual action and self-reliance, and as a public official, he consistently argued that the central government was constitutionally prevented from taking a direct hand in the economy. But he had also built a reputation as "The Great Engineer," and was always consumed with the need to do something, and to be seen doing it. His first reaction to the Wall Street crash and subsequent downturn was to decide that runaway inflation was the problem (he wasn't the only one) and to combat it by having the Fed drastically reduce the money supply. Plus, he undertook what may have been the first major "stimulus" program, increasing spending on public buildings by over $400 million, persuaded major businesses not to cut wages, and even suggested, as early as December 1929, the need for public health management and regulation of the electric industry. So, definitely not a "do-nothing" executive. Which leads me into....
3. The Republican Party opposed doing anything to help the country.
(Okay, I could have wrapped this into the last one but I wanted three headings.) Oh yes, the GOP did want to take action to protect the country--and that was the trouble. One key aspect of the Republicans until the mid-20th century was their commitment to a protective tariff to bolster home industries, a position dating back to their formation in the industrialist North. Hoover and his Republican Congress were no exceptions, and their tendency was strengthened by demands from farmers and businessmen alike that they be protected from foreign competition right now. The result was the God-awful Smoot-Hawley Tariff of 1930. Native and foreign observers predicted that the tax would prove disastrous, and it did. The international economy was completely broken up; many countries, seeing their American markets ruined, retaliated by raising their own tariffs on U.S. exports, or boycotting them altogether. The cost to our productivity was probably incalculable, but certainly it ran into the billions. Not for the last time, trying to control events from Washington proved disastrous. And the same could be said of Hoover's other attempts--restricting the money supply and preventing businesses from cutting wages played well initially, but they also took away the market's flexibility and did more harm in the long run. Again.
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Long story short--no one denies that there would have been a nasty recession for the U.S. to go through no matter what. But there was no reason, at the beginning, for it to have been any more than that. We'd had lots of economic "panics" before, and they lasted only a year or two with little long-term damage. What made things worse was the intervention by the Hoover administration, or at least the ways in which it intervened. Sinking your own country's economy is bad enough, sinking the international economy--now that's quite an accomplishment. At any rate, I think we can put to bed this idea that the boom of the '20s somehow caused the Depression, and that a government refusal to respond made it awful.
Unfortunately, voters and elites alike drew exactly the wrong conclusions from the 1929-32 period, deciding things were now so bad because government hadn't done enough. That's how we got FDR and the brand-spanking New Deal. Exactly how and why that failed, I'll get to later. To be continued....
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