Global Research
Devon DB
In 2007, the world became engulfed in the largest economic slump since the Great Depression. The crisis was so damaging it was coined “the Great Recession” and there was much comparison of the recession to the Great Depression of the 1930s in the mainstream media. However, what many failed to do was an in-depth analysis of both the Great Depression and the Great Recession, to compare and contrast to two. Thus, this article will be a comparison of both economic downfalls, ending in an analysis of the current economic situation America finds itself in and asking the question if another Great Depression is possible.
The decade prior to the 1930s, the US was in a time of great economic boom known as “The Roaring Twenties.” Yet while the nation’s income rose about 20% (from $74.3 billion in 1923 to $89 billion in 1929), the majority of this wealth went to the richest as can be seen by the fact that “in 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%” [1] and that the disposable income per capita rose 9% from 1920 to 1929, while the top 1% enjoyed a massive 75% increase in per capita disposable income. This greatly increased wealth disparity and led to a imbalance in the US economy where demand wasn’t equal to supply and thus there was an oversupply of goods as “those [the poor and the middle class] whose needs were not satiated could not afford more, whereas the wealthy were satiated by spending only a small portion of their income,” [2] which caused the US to become reliant on three things to keep the economy afloat: credit sales, luxury spending, and investment by the rich. However, the major flaw of an economy based on credit sales, luxury spending, and investments was that all three of those activities depended upon people’s confidence in the economy. If confidence were to lower, then those activities would come to a halt and with it the US economy.
The massive inequality in wealth was not solely in terms of socioeconomic status, but also extended to corporations as well. During the first World War, the federal government subsidized farms in earnest as they wanted to feed not only Americans, but also Europeans. However, once the war ended, so did subsidies for farms. The government began to support the automobile and radio industries, with help from then-President Calvin Coolidge in the form of pressuring the Federal Reserve to keep easy credit, as to allow for both industries to easily be heavily invested in.
In the 1920s, the profits of the automobile and its connected industries such as lead, nickel, and steel skyrocketed, so much so, that by 1929 “a mere 200 corporations controlled approximately half of all corporate wealth.” [3] The automobile boom also led to the creation of hotels and motels which in turn led “Americans spent more than a $1 billion each year on the construction and maintenance of highways, and at least another $400 million annually for city streets” [4] in the 1920s. In addition to the massive success of the automobile industry, the radio industry also preformed exceptionally well as “Radio stations, electronic stores, and electricity companies all needed the radio to survive, and relied upon the constant growth of the radio market to expand and grow themselves.” [5]
This dependence on two main industries to support the entire US economy led to quite serious problems as in the case of depending on the spending habits of the upperclass to support the economy, if the expansion of either the radio or automobile industries slowed down or halted, the US economy would meet the same fate.
Still further, there was wealth inequality on the international banking scene. After World War 1, the Americans lent their “European allies $7 billion, and then another $3.3 billion by 1920” and by 1924 “the U.S. started lending to Axis Germany,” eventually “climbing to $900 million in 1924, and $1.25 billion in 1927 and 1928” [6] The Europeans then used the loans to buy US goods and thus were in no shape to pay back the loans. One must realize that after World War 1, virtually all of Europe was hit hard economically by the war and thus unable to make any goods with which to sell, yet the US played a role as well due to its high tariffs on imports, thus increasing the difficulty in which Europe could sell goods and pay off its debt.
Yet, the massive wealth inequalities domestically were not the only problems that led to the stock market crash, financial speculation was rampant also, which allowed corporations to make huge amounts of money. As long as stock prices continued to rise, the corporation itself became near-meaningless. “One such example is RCA corporation, whose stock price leapt from 85 to 420 during 1928, even though it had not yet paid a single dividend.” [7] This was a serious fundamental problem in the stock market as many forgot that if stock prices increase extremely quickly, a bubble is being created and sooner or later it will burst. This speculation greatly distorted the values of corporations. Usually, the stock price somewhat correlates with the performance of the company, but due to the rampant speculation, companies that were doing horribly could now seem as if they were great investments, all based on the increase in their stock price.
A factor that led to rampant speculation was the ability to buy stocks on margin, which allowed for one to buy stocks without actually having the money. Due to this, investors could potentially get extremely high returns on their investments. Buying stocks on margin was quite easy as the process
functioned much the same way as buying a car on credit. Using the example of [the RCA corporation], a Mr. John Doe could buy 1 share of the company by putting up $10 of his own, and borrowing $75 from his broker. If he sold the stock at $420 a year later he would have turned his original investment of just $10 into $341.25 ($420 minus the $75 and 5% interest owed to the broker). That makes a return of over 3400%! [8] (emphasis added)
This massive speculation led stock prices to incredibly high levels, with “the total of outstanding brokers' loans [being] over $7 billion” [9] by mid-1929.
The stock market bubble soon burst as on October 21, 1929, prices began to fall so rapidly that the ticker fell behind. Prices fell even further due to investors fears which led them to sell their shares. The speculation and wealth inequality caused a major undermining of the entire market which led to the wealthy ending their spending on luxury items and investing, as well as “[the] middle-class and poor stopped buying things with installment credit for fear of loosing their jobs, and not being able to pay the interest,” [10] and with it the US economy came to a griding halt. The lack of spending led to a nine percent decrease in industrial production from October to December 1929. This led to job losses, defaults on interest payments, and the destruction of the radio and automobile industries as inventory grew due to no one having the ability to purchase anything.
Internationally, loaning had already come to an abrupt halt earlier in the decade because “With such tremendous profits to be made in the stock market nobody wanted to make low interest loans” [11] and trade quickly ended as the US increased already high tariffs and foreigners quit purchasing US goods.
A topic that is rarely mentioned in regards to the Great Depression is the role of the Federal Reserve. The Fed played a major role in why investment purchases collapsed dramatically. The main problem was that in the onset of the Great Depression, there was rampant deflation. This was caused by the fact that the M1 money supply had reached a peak in 1929 and went downhill from there, yet the Fed didn’t see this. Instead, they saw “only the statistics on the monetary base, the currency in circulation plus the funds held as reserves by the banks with the twelve Federal Reserve Banks,” [12] which showed that the monetary base had been steadily increasing since about 1929. Thus, since the Fed saw that the money supply was increasing, they found no reason to act, when in reality, the M2 money supply was decreasing rapidly. However, in the late 1920s, the Fed acted to end speculative banking and wound up applying more restrictive monetary policies than thought. This resulted in banks closing en masse, which the Fed initially welcomed, yet this caused
the banks and the banking public [to become] alarmed. Some people withdrew their funds from the banks. The banks became worried about withdrawal of deposits and even runs on banks. The banks reacted by holding reserves in excess of what the Fed required. [13]
This massive withdrawal of funds emptied the coffers of banks, thus causing the aforementioned deflation. The Fed’s actions, along with the stock market crash, led to a 90% decrease in investment purchases, cutbacks in the labor force due to business not being able to sell anything, and a downturn in consumer spending.
Thus, due to a mixture of socio-economic and industrial wealth inequality, high tariffs on foreign imports, a stock market bubble, and poor economic management by the Federal Reserve, the United States descended into the Great Depression.
Initially, in the onset of the Depression, then-President Hoover decided against the government taking action to help individuals on the grounds that “if left alone the economy would right itself and argued that direct government assistance to individuals would weaken the moral fiber of the American people.” [14] However, when he was forced by Congress to intervene in the economy, Hoover focused his “spending [on stabilizing] the business community, believing that returning prosperity would eventually ‘trickle down’ to the poor majority,” [15] and thus began the first implementation of what would later be called in the ‘70s, “trickle-down economics.”
The public, being appalled by the lack of empathy from Hoover, voted Franklin D. Roosevelt (FDR) into office. Once in office, he began embarking on programs that would come to be known as “The New Deal.” However, this was not a deal concerned with easing the pain of the Depression on ordinary people, rather FDR “sought to save capitalism and the fundamental institutions of American society from the disaster of the Great Depression.” [16] While the popular view is that the New Deal was radically different from Hoover’s plan, in reality the two plans didn’t truly differ to much as while some social programs were implemented, overall FDR’s plan “tended toward a continuation of ‘trickle down’ policies, albeit better-funded and executed more creatively.” [17]
He never truly adopted Keynesian economics, which argued that the “government should use its massive financial power (taxing and spending) as a sort of ballast to stabilize the economy.” [18] This can be seen in the Agricultural Adjustment Act which paid farmers to produce less, however, this “did little for smaller farmers and led to the eviction and homelessness of tenants and sharecroppers whose landlords hardly needed their services under a system that paid them to grow less” [19], while also not addressing the main problem of the Depression: weak consumer spending. Overall, the Act benefited mainly moderate and large agriculture operations. Another example is the National Industrial Recovery Act. The National Industrial Recovery Act encouraged industries to avoid selling below cost to attract more customers, and while this was good for businesses in the short run, it “resulted in increased unemployment and an even smaller customer pool in the long-run.” [20] FDR’s overall goal, while he did aid in the creation of social programs such as Social Security and enacted many jobs programs, was to protect capitalism and the very institutions that led to the Great Depression.
Devon DB
The decade prior to the 1930s, the US was in a time of great economic boom known as “The Roaring Twenties.” Yet while the nation’s income rose about 20% (from $74.3 billion in 1923 to $89 billion in 1929), the majority of this wealth went to the richest as can be seen by the fact that “in 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%” [1] and that the disposable income per capita rose 9% from 1920 to 1929, while the top 1% enjoyed a massive 75% increase in per capita disposable income. This greatly increased wealth disparity and led to a imbalance in the US economy where demand wasn’t equal to supply and thus there was an oversupply of goods as “those [the poor and the middle class] whose needs were not satiated could not afford more, whereas the wealthy were satiated by spending only a small portion of their income,” [2] which caused the US to become reliant on three things to keep the economy afloat: credit sales, luxury spending, and investment by the rich. However, the major flaw of an economy based on credit sales, luxury spending, and investments was that all three of those activities depended upon people’s confidence in the economy. If confidence were to lower, then those activities would come to a halt and with it the US economy.
The massive inequality in wealth was not solely in terms of socioeconomic status, but also extended to corporations as well. During the first World War, the federal government subsidized farms in earnest as they wanted to feed not only Americans, but also Europeans. However, once the war ended, so did subsidies for farms. The government began to support the automobile and radio industries, with help from then-President Calvin Coolidge in the form of pressuring the Federal Reserve to keep easy credit, as to allow for both industries to easily be heavily invested in.
In the 1920s, the profits of the automobile and its connected industries such as lead, nickel, and steel skyrocketed, so much so, that by 1929 “a mere 200 corporations controlled approximately half of all corporate wealth.” [3] The automobile boom also led to the creation of hotels and motels which in turn led “Americans spent more than a $1 billion each year on the construction and maintenance of highways, and at least another $400 million annually for city streets” [4] in the 1920s. In addition to the massive success of the automobile industry, the radio industry also preformed exceptionally well as “Radio stations, electronic stores, and electricity companies all needed the radio to survive, and relied upon the constant growth of the radio market to expand and grow themselves.” [5]
This dependence on two main industries to support the entire US economy led to quite serious problems as in the case of depending on the spending habits of the upperclass to support the economy, if the expansion of either the radio or automobile industries slowed down or halted, the US economy would meet the same fate.
Still further, there was wealth inequality on the international banking scene. After World War 1, the Americans lent their “European allies $7 billion, and then another $3.3 billion by 1920” and by 1924 “the U.S. started lending to Axis Germany,” eventually “climbing to $900 million in 1924, and $1.25 billion in 1927 and 1928” [6] The Europeans then used the loans to buy US goods and thus were in no shape to pay back the loans. One must realize that after World War 1, virtually all of Europe was hit hard economically by the war and thus unable to make any goods with which to sell, yet the US played a role as well due to its high tariffs on imports, thus increasing the difficulty in which Europe could sell goods and pay off its debt.
Yet, the massive wealth inequalities domestically were not the only problems that led to the stock market crash, financial speculation was rampant also, which allowed corporations to make huge amounts of money. As long as stock prices continued to rise, the corporation itself became near-meaningless. “One such example is RCA corporation, whose stock price leapt from 85 to 420 during 1928, even though it had not yet paid a single dividend.” [7] This was a serious fundamental problem in the stock market as many forgot that if stock prices increase extremely quickly, a bubble is being created and sooner or later it will burst. This speculation greatly distorted the values of corporations. Usually, the stock price somewhat correlates with the performance of the company, but due to the rampant speculation, companies that were doing horribly could now seem as if they were great investments, all based on the increase in their stock price.
A factor that led to rampant speculation was the ability to buy stocks on margin, which allowed for one to buy stocks without actually having the money. Due to this, investors could potentially get extremely high returns on their investments. Buying stocks on margin was quite easy as the process
functioned much the same way as buying a car on credit. Using the example of [the RCA corporation], a Mr. John Doe could buy 1 share of the company by putting up $10 of his own, and borrowing $75 from his broker. If he sold the stock at $420 a year later he would have turned his original investment of just $10 into $341.25 ($420 minus the $75 and 5% interest owed to the broker). That makes a return of over 3400%! [8] (emphasis added)
This massive speculation led stock prices to incredibly high levels, with “the total of outstanding brokers' loans [being] over $7 billion” [9] by mid-1929.
The stock market bubble soon burst as on October 21, 1929, prices began to fall so rapidly that the ticker fell behind. Prices fell even further due to investors fears which led them to sell their shares. The speculation and wealth inequality caused a major undermining of the entire market which led to the wealthy ending their spending on luxury items and investing, as well as “[the] middle-class and poor stopped buying things with installment credit for fear of loosing their jobs, and not being able to pay the interest,” [10] and with it the US economy came to a griding halt. The lack of spending led to a nine percent decrease in industrial production from October to December 1929. This led to job losses, defaults on interest payments, and the destruction of the radio and automobile industries as inventory grew due to no one having the ability to purchase anything.
Internationally, loaning had already come to an abrupt halt earlier in the decade because “With such tremendous profits to be made in the stock market nobody wanted to make low interest loans” [11] and trade quickly ended as the US increased already high tariffs and foreigners quit purchasing US goods.
A topic that is rarely mentioned in regards to the Great Depression is the role of the Federal Reserve. The Fed played a major role in why investment purchases collapsed dramatically. The main problem was that in the onset of the Great Depression, there was rampant deflation. This was caused by the fact that the M1 money supply had reached a peak in 1929 and went downhill from there, yet the Fed didn’t see this. Instead, they saw “only the statistics on the monetary base, the currency in circulation plus the funds held as reserves by the banks with the twelve Federal Reserve Banks,” [12] which showed that the monetary base had been steadily increasing since about 1929. Thus, since the Fed saw that the money supply was increasing, they found no reason to act, when in reality, the M2 money supply was decreasing rapidly. However, in the late 1920s, the Fed acted to end speculative banking and wound up applying more restrictive monetary policies than thought. This resulted in banks closing en masse, which the Fed initially welcomed, yet this caused
the banks and the banking public [to become] alarmed. Some people withdrew their funds from the banks. The banks became worried about withdrawal of deposits and even runs on banks. The banks reacted by holding reserves in excess of what the Fed required. [13]
This massive withdrawal of funds emptied the coffers of banks, thus causing the aforementioned deflation. The Fed’s actions, along with the stock market crash, led to a 90% decrease in investment purchases, cutbacks in the labor force due to business not being able to sell anything, and a downturn in consumer spending.
Thus, due to a mixture of socio-economic and industrial wealth inequality, high tariffs on foreign imports, a stock market bubble, and poor economic management by the Federal Reserve, the United States descended into the Great Depression.
Initially, in the onset of the Depression, then-President Hoover decided against the government taking action to help individuals on the grounds that “if left alone the economy would right itself and argued that direct government assistance to individuals would weaken the moral fiber of the American people.” [14] However, when he was forced by Congress to intervene in the economy, Hoover focused his “spending [on stabilizing] the business community, believing that returning prosperity would eventually ‘trickle down’ to the poor majority,” [15] and thus began the first implementation of what would later be called in the ‘70s, “trickle-down economics.”
The public, being appalled by the lack of empathy from Hoover, voted Franklin D. Roosevelt (FDR) into office. Once in office, he began embarking on programs that would come to be known as “The New Deal.” However, this was not a deal concerned with easing the pain of the Depression on ordinary people, rather FDR “sought to save capitalism and the fundamental institutions of American society from the disaster of the Great Depression.” [16] While the popular view is that the New Deal was radically different from Hoover’s plan, in reality the two plans didn’t truly differ to much as while some social programs were implemented, overall FDR’s plan “tended toward a continuation of ‘trickle down’ policies, albeit better-funded and executed more creatively.” [17]
He never truly adopted Keynesian economics, which argued that the “government should use its massive financial power (taxing and spending) as a sort of ballast to stabilize the economy.” [18] This can be seen in the Agricultural Adjustment Act which paid farmers to produce less, however, this “did little for smaller farmers and led to the eviction and homelessness of tenants and sharecroppers whose landlords hardly needed their services under a system that paid them to grow less” [19], while also not addressing the main problem of the Depression: weak consumer spending. Overall, the Act benefited mainly moderate and large agriculture operations. Another example is the National Industrial Recovery Act. The National Industrial Recovery Act encouraged industries to avoid selling below cost to attract more customers, and while this was good for businesses in the short run, it “resulted in increased unemployment and an even smaller customer pool in the long-run.” [20] FDR’s overall goal, while he did aid in the creation of social programs such as Social Security and enacted many jobs programs, was to protect capitalism and the very institutions that led to the Great Depression.
Posts
