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Thursday, May 01, 2008

Gene Smiley on The Great Depression

A review of the Gene Smiley book is here:
...the 1920s had been a period of dramatic economic growth and technological innovation that was lowering the costs of manufacturing and increasing the supplies of a wide variety of goods and services supplied to the consuming public.

Only agriculture remained to a great degree in the doldrums. With the end of the First World War, the global demand for American farm products had declined and the farming community had failed to adjust to the new international market situation. Once the Great Depression began, unemployment kept rising until it reached about 25 percent of the work force in late 1932. Both manufacturing output and construction decreased significantly, and international trade experienced a major decline.

He sees a primary source of the problem in the return to the gold standard by countries such as Great Britain at a rate of exchange that was too high relative to the domestic level of prices and wages that had been created by the wartime inflation. The problem was that the British trade unions had become too strong and wouldn’t accept cuts in money wages, and the British government was not willing to devalue the pound. Hence, Britain went into the Great Depression already in a severe recession.

...in 1927 and 1928 the Federal Reserve had increased the money supply to keep the stock market and construction booms going. Then the Fed brought the monetary expansion to a halt in late 1928 and 1929. That set the stage for the stock-market crash.

The economic policies of the Hoover administration were an unmitigated disaster. Taxes were raised and the government set up subsidy programs to prop up both unprofitable industries and wasteful agricultural production. Congress passed the Hawley-Smoot tariff that raised import taxes to a historical high, which set off an international trade war that ruined import and export markets around the world.

Anti-competitive price and wage rigidities were the primary reason the Depression grew in intensity as the early 1930s progressed, Smiley emphasizes.

The growing circle of unprofitable businesses in the face of these price and wage rigidities undermined the banking system, as an increasing number of enterprises could not pay off their loans. Bank-depositor panics broke out that led to bank runs. The financial sector of the American economy, as a result, went into a tailspin. The banking crisis was at its worst in the period between the November presidential election of 1932 and Franklin D. Roosevelt’s inauguration in March 1933.

Smiley persuasively shows with a thorough and detailed analysis of the facts that, contrary to many popular impressions, Roosevelt’s New Deal did not end the Great Depression. Instead, it prolonged the imbalances and distortions and indeed in many cases made them worse.

Economic improvement began only after the U.S. Supreme Court declared most of the New Deal systems of planning and controls to be unconstitutional in 1935 and 1936. To the extent that the private sector was freed from the heavy hand of direct government supervision, industries slowly began to adjust and expand output and add to their labor forces. But Smiley explains that Roosevelt undermined this recovery in 1936 and 1937. Angry that the Supreme Court had thrown out most of the central features of his New Deal, he went on an anti-business crusade that weakened business confidence in the political and economic future.

Then, in 1937-38, the American economy experienced a new depression within the Great Depression, owing to the Federal Reserve’s raising reserve requirements on commercial banks, which induced a monetary contraction and a decline in investment lending. Durable-goods manufacturing fell by 67 percent between May 1937 and May 1938.

Smiley calculates that during both the 1930s and the war years of the 1940s, the American economy experienced periods of capital consumption, when capital equipment and other durable production assets were not replaced as they were worn out.

The enduring legacy of the Great Depression, Smiley concludes, has been a total misunderstanding of this period: it was government mismanagement and intervention that created this economic crisis. And furthermore, what the government did during the decade of the 1930s left us with the institutional burden of the regulated economy and the welfare state. “What failed in the 1930s were governments, in their eagerness to direct activity to achieve political ends,” Smiley says at the end of this insightful and valuable work. “It has taken us a long time to begin to understand these costly lessons of the 1930s.”

30 comments:

Harry Eagar said...

Farming wasn't 'in the doldrums.'

It crashed.

Blaming the New Deal, which was tried for only a few months, is cute, too.

I'll give the Bush crash a similar amount of time before declaring tax cuts a failure and an aggravation of the business cycle. Oops. Time's up.

Physician heal thyself.

joe shropshire said...

Again, that's not the point. If Bush simply kicks the New Deal futher along on the path to bankruptcy and ruin, then in the long run he will have won. All the important stuff happens long after you are dead, Harry.

joe shropshire said...

I fully expect Bush to be consigned to the ash heap of history, by the way. But, I also expected to lose the Cold War. And, if McCain wins, he's pledged to extend the Bush tax cuts, and if he doesn't, which I expect he won't, then we'll just have to find a way to do to him what the Viet Cong couldn't. War is a funny thing.

Harry Eagar said...

Why aren't the tax cuts working now?

I understand the Republican economic theory, though: 'Let me avoid paying taxes and you will prosper.'

joe shropshire said...

I pay taxes so as to stay out of prison, Harry. (And if I've avoided any lately, well, it sure doesn't feel like it.) My economic theory is that anything that lowers my cost of staying out of prison works just fine. Your mileage may vary. Why do you pay taxes?

Bret said...

harry eagar asks: "Why aren't the tax cuts working now?"

Why do you think they aren't working? From what I see, the economy is doing remarkably well considering a war, spiraling oil costs, and a financial meltdown.

Harry Eagar said...

Wars in the past have brought prosperity to the home front. Why do you consider this one a negative?

Harry Eagar said...

Little do I travel in realms of gold, but finding myself in New York City, I picked up Monday's Wall Street Journal, where I read an essay by Mary O'Grady about free market tendencies in Peru.

These, she avers, have had the excellent effect of reducing inflation from 7000% to 2.3%. Quoth she: 'That means that even before any other changes in government policy, every Peruvian has enjoyed a tax cut and a boost to his savings power.

Magic words to a Journalist: tax cuts and savings power.

Ms. O'Grady is reporting from Iquitos, a place she does not describe but which I know about. It is a malarious hellhole.

People who live in Iquitos do not worry about enhancing their savings power. The consume all they can produce or acquire and would consume more if they could.

aog said...

And of course, the poor do not benefit from reduced inflation. Nor will they benefit from any increased saving or migration of assets back to Peru which might lead to more local production and a better local economy. Instead the government should re-ignite inflation and raise taxes to stamp out any increased savings. That'll make things better in Iquitos!

Bret said...

Is the town of I-quitos next to the town of Mos-quitos? :-)

Bret said...

harry eagar wrote: "...and would consume more if they could..."

That certainly describes me. I would love to consume more. Much, much, more.

Doesn't that describe civilization as a whole? Are there places where the people just love producing stuff that they have no intention of consuming (or using to produce stuff to be consumed or trading for other stuff to be consumed or to enhance production of stuff to be consumed)? Are there places with mounds of rotting goods that people produced for amusement without ever intending to consume them?

For the most part, everything that is produced is consumed (especially if you consider depreciation of capital goods a sort of time-released consumption) and if more was produced, more would be consumed. Economics is all about allocating scarce resources and maximizing production.

Howard said...

Ms. O'Grady states(some excerpts):

"...daily life here(Iquitos) is light years away from what it is in the Peruvian capital.

After almost two decades of gradual reforms by the central government, Lima is today home to first-world services, globally competitive businesses, shopping malls and an emerging middle class. But here in the hub of the Peruvian Amazon, living standards are all too similar to what they were 30 years ago.

Peru has been experiencing fast growth – better than 6% annually – for almost seven years, and it has largely occurred on the coast and in the capital city. But the mountain and jungle regions of the country have not kept up.

...price stability on its own would have left the country well below its potential. Far more impressive is the restructuring of the economy, which has led both to growth and to a more equal distribution of opportunity.

The key reform that has made all this possible is the opening of the economy, which until 1990 had very high tariffs designed to protect local industries.

So what's the matter with Iquitos? It is not, as you might think, the fact that it is so isolated. Mr. GarcĂ­a told me that he believes the real problem is that its most valuable resources – mahogany and cedar – grow on land that has no property rights. There are some long-term concessions, but he says he would like to see many more so that those who harvest the wood have the proper incentives to care for the forests."

Her emphasis is on the progress Peru has made. She acknowledges the lagging performance in Iquitos and the surrounding region. She also touches on the internal struggles in the country and the region. Read the whole article (brief) and see what you think of Harrys' parsing.. See also very good Alan Garcia article linked to therein. (let me know if link is a problem)

Harry Eagar said...

I'm just pointing out the blinkered insanity of saying that people who are too poor to either pay taxes or save are 'already' benefitting.

This is the devil-take-the-hindmost attitude that makes people like me think that people like O'Grady are crazy.

An anecdote:

I have a friend who was a missionary in Bolivia, with frequent trips to Peru for, among other things, injections, since they didn't sterilize needles in Bolivia. (Maybe they do now.) He was also a pilot.

A pilot in the US, who had taken advantage of his 'saving power,' and who had a collection of vintage aircraft, asked my friend to be on the lookout for old, salvagable planes. 'Perhaps someone stored one in a barn or shed.'

My friend said, 'He had no idea what life is like on the Altiplano. Nobody stores planes. If someone had a broken plane, it would be dismantled for housing material.'

That was over 40 years ago. O'Grady still isn't getting it.

Bret said...

harry: "I'm just pointing out the blinkered insanity of saying that people who are too poor to either pay taxes or save are 'already' benefitting."

Everybody, no matter how poor, bears the burden of income tax indirectly via increased costs of goods and services. Everybody, no matter how poor, bears the burden of tariffs via increased costs of imported goods.

Those burdens may be relatively small (or at least the reduction in burden small) in a place like Iquitos, but they're still real.

aog said...

Mr. Eagar;

You should at least try to be consistent in your criticism of O'Grady. If her statements about benefits to the poor are blinkered insanity, she can hardly have a "devil take the hindmost" attitude.

Harry Eagar said...

I don't see why a person cannot simultaneously have a view of the world that is so divorced from reality as to be insane and also view with indifference the suffering of the poor.

I'd say that's the difining attitude of free-marketeers: Whatever the market does, is best.

Especially so if one has been in Iquitos, where, contra Bret, a large part of the population is indifferent to taxes and inflation, since they don't participate in a money economy.

The problem of Iquitos is not inflation or over-regulation of (non-existent) enterprises. The problem of Iquitos is endemic cholera.

It isn't obvious that any amount of money could control this, given Iquitos' unhappy geography (you may recall that geography is of equal weight with capital in an economy).

It may be that modern people should not try to live in Iquitos.

It's certain that the people of Iquitos will not generate on their own the money it would take to relieve them of cholera; and pretty certain that the Limans will not volunteer the big sums necessary even once they get to that level of prosperity.

joe shropshire said...

It's possible, though not certain, that a more prosperous Lima might let more people get out of Iquitos. So far as I can tell that's what happened in Appalachia, inasmuch as it did happen. It's not insane to think that this might be the best outcome you're likely to get.

erp said...

Per Wikipedia, ... cholera ... is fairly simple to prevent if proper sanitation practices are followed.

If "revolutionaries" and all the relief agencies, the U.N., the church affiliated groups, etc. in South America (and elsewhere) wanted to help the downtrodden, they would teach them about hygiene and nutrition instead of Lenin and Marx, but then, if the downtrodden learn how to rely on themselves, what would happen to the do-gooders' power base and access to millions in funds from mostly hard working taxpayers.

Harry, never before in the course of history have so many gazillions been spent ostensibly to help the starving and sick to less avail. Where has all that money gone?

aog said...

Mr. Eager;

If she were indifferent to the poor, why would she care about whether tax cuts and increased savings power benefit the poor? Your claim of insanity rests on her actually caring, because if she doesn't, then she's just being cynical.

Harry Eagar said...

Of course she's cynical.

erp, Iquitos is geographically interesting, with a river that rises 30 feet every year.

Basic hygiene and pure public water supplies are kind of hard to maintain in such conditions.

It probably cannot support a dense, modern population, although they're trying.

joe, as someone from Appalachia, I will assure you that free market capitalism never did anything for the people there. I recommend 'Night Comes to the Cumberlands,' especially the part about bulldozing the graveyards.

joe shropshire said...

What I said was, it may have done something for the people who left Appalachia.

aog said...

So we can take your original claims of "blinkered insanity" and "crazy" as no longer operative? I can't say it does much for any point you're trying to make to throw out an inconsistent array of insults just to see what sticks.

erp said...

Harry, if the river rises 30 feet every year, how is it that any people survive?

The problem is one that only FDR's New Deal can solve. Surely there's someone in Peru who remembers how he solved all our problems.

Harry Eagar said...

Oh, well, even steven, joe.

I bulldoze your farm out of existence but you can easily get a job as a migrant fruit-picker.

Who wouldn't be grateful to live in such a system?

joe shropshire said...

I wasn't talking about migrant fuit pickers, Harry. I was talking about you, your brother, his children, your children, and your grandchild. Congratulations, by the way.

joe shropshire said...

I would add: whether you are grateful or not is, of course, up to you. But I would see no sin in it.

Harry Eagar said...

Joe, the family is a lot poorer now than it was in the days of agrarianism.

I don't mind that, it's payback for losing a war.

I am sympathetic to the crises of the working poor not because I am poor but because I am sympathetic.

aog said...

I am still wondering how a sin of omission (the failure to actively improve the lives of the poor) got turned in to a sin of commission (actively making the lives of the poor worse), i.e. from bringing prosperity to Appalachie to bulldozing farms.

Harry Eagar said...

I'm not following you.

The comfortable agrarian life of the southern Appalachians might not have appealed to city folk but (as Owsley explained in 'Plain Folk of the Old South'), there was no local agitation to change it.

The imposition of Delaware law on illiterate highlanders did the highlanders no good and, as in the cases tracked by Caudill, made many destitute who had considered themselves well off.

They weren't as well off, materially, as New York plutocrats, but none of them had ever been to New York, so they didn't know or care. When Tennessee Coal & Iron destroyed their farms, then they cared.

joe shropshire said...

None of which as anything to do with my mother's folk, who survived the famine in Ireland, came over to Saint John's in the '70s or '80s, and down to Philadelphia a generation after. My dad's folk, who knows: I can tell you that I got any number of phone calls when I was in the Air Force from this or that Shropshire, all of them African-American. Are you any relation to... To which all I could say was, maybe, maybe not. But there's no original sin to dispense with so far as I can see. Your family's mileage may vary.