Over at Zero Hedge, Jim Quinn has an excellent piece which explodes the Keynesian myths about the Great Depression, as well as those myths being peddled today as a cure for the current one. The crucial thing to remember is that the mechanism which got us in to the Great Depression is the same which got is in to our current mess:
…They don’t call the 1920s roaring because money wasn’t flowing freely and consumers were practicing frugality. The newly created Federal Reserve expanded credit by setting below-market interest rates and low reserve requirements that favored the big Wall Street banks. The Federal Reserve increased the money supply by 60% during the period following the recession of 1921. By the latter part of the decade, “buying on margin” entered the American vocabulary as more and more Americans overextended themselves to speculate on the soaring stock market.
The 1920s marked the beginning of mass production and the emergence of consumerism in America, with automobiles a prominent symbol of the latter. In 1919, there were just 6.7 million cars on American roads. By 1929, the number had grown to more than 27 million cars, or nearly one car for every household. During this period banks offered the country’s first home mortgages and manufacturers of everything – from cars to irons – allowed consumers to pay “on time.” Installment credit soared during the 1920s. About 60% of all furniture and 75% of all radios were purchased on installment plans. Thrift and saving were replaced in the new consumer society by spending and borrowing…
Sound familiar? Its pretty much what we did from 1993 until 2008; vastly increase money supply and go on a borrow and spending binge (public and private) which boosted the economy with a false glow of health, but all the while catastrophe was impending as the bills came due. Do keep in mind that there is plenty of Republican as well as Democrat blame to go around here; don’t get too hung up on blame games. Fundamentally, it was the economic system – erected by the Federal Reserve – which got us in to the Great and current Depression.
The article goes on to note that the “cure” for the Depression (old and new) has been the same…massively increasing the same sorts of activities which caused the problem. Hoover is blamed in dishonest histories of the era as sitting there doing nothing and it took FDR’s big spending New Deal to get us moving – as the linked article points out, Hoover increased per-capita federal spending by 88%; it didn’t work, and all FDR could think to do was double and triple down (as Obama seems to want to do now) on the same failed, easy money policies. They will have the same effect now as they did then – a temporary boost to GDP which will lead to further and worse disaster down the road.
It was, ultimately, the disruptions of the First World War which set in train the economic crisis which the Federal Reserve (and other central banks) set to “cure” by easy money policies. Wealth having been massively withered away by war, populations having lost between war and disease at least 60 million fit, young people (a majority of them in the most advanced, industrial societies), there was no chance the world was going to get out of it without at least a generation of strained economics. This was not something completely new to human experience – in post-Napoleonic Europe, there was economic depression for 15 years. You don’t just walk past earth-shaking events without getting a scratch…though the Keynesians (old and new) believe you can.
We got lucky post-WWII in that there was a population boom which stimulated American production allowing us to build up real wealth for the first time since pre-WWI. But as the population boom leveled off and the global economy rebuilt itself (especially Japan and Germany, which had been literally blown to pieces in WWII), the strain resumed on the American economy. We had a choice – hunker down, retrench and continue to build wealth until we were past the crunch, or go on another binge of easy money. The Federal Reserve (with the gleeful agreement of the Banksters and Bureaucrats) opted for a binge of easy money. Lowered tax rates in the 1980’s helped rebuild a bit of American wealth, but starting during that time and accelerating in the 90’s, we started to move our wealth to Third World nations while using easier and easier monetary policy to keep up an illusion of wealth here at home.
As I’ve said before, we can only work our way out of this. First, we must admit that we’re broke – not only out of money, but massively in debt. We have to retrench – balance our budgets, slash our taxes, ease our regulatory burden. We have to allow asset prices – home, stocks, everything – to reach their real value (which is still a lot lower than they are now) and then we have to get to work making, mining and growing more of our own stuff. It will take a generation to get back up to genuine prosperity – the generation we should have given in 1919, but have continually put off for nearly a century. The piper must be paid, and while we can whine and moan that we’re stuck with the bill, there’s just nothing for it but for us to do the right thing.
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