Recently a snapshot of the events which led to and culminated in the Great Depression of the 1930’s was posted on a number of Obama groups. It was titled – “Brushing up on The Great Depression”.
In response, economic historian Mary Schweitzer of Newark posted a fascinating summary of past attitudes and events on this important subject, on the Delaware for Obama group site. It deserves wider exposure as a timely reminder.
As you will discover, much of what is happening socially, economically and politically today is revealed in the attitudes of the past.
Thank you Mary
This is Mary’s response ..
The Great Depression began 8-10 months BEFORE the stock market crash
“Some other similarities to give you pause..
There were more individuals who owned some stock than at any time before – or any time sense, until the IRA and privatization movements pushed people into the stock market as fewer companies offered pensions, and marketing convinced people to get involved in securities markets before they had enough assets to be sensibly diversified.
In the “prosperous” decade of the 1920s, there were serious structural problems that were not being addressed. The South maintained the sharecropper system, that forced the poverty-stricken (white and black both) to plant more cotton than was sensible, given increased competition from other nations, and of course the boll weevil.
The type of job that had been the bread-and-butter of unskilled male workers – sweat work – digging ditches, clearing away roads, etc. – had disappeared due to mechanization, and there was no way to retrain the unemployed.
Women from the old suffragette movement had succeeded in passing a law providing clinics in out-of-the-way locations (like Appalachia) staffed by nurses, to ensure that children got vaccines and early health care. After several efforts, in 1928 the AMA finally succeeded in getting rid of these federally funded clinics because, they said, nurses shouldn’t be doing the work of MD’s. No, they did not have a replacement plan – the poor just had to do without medical care.
Between 1929 and March 1933, prices fell by 25%. That meant that nominal interest rates of 3 or 4% had effective REAL interest rates below zero (in inflation you add expectations of price rises to the real interest rate – in deflation you subtract instead). So it wasn’t a matter of “confidence” (which they talked about all the time) – with an effective NEGATIVE real interest rate, lending just did not happen.
In the first critical years of the crash, the Fed refused to bail out failing banks (if they’re failing, there must be something wrong with them, and we should just let them pay the price, was the attitude).
But most of the money supply comes from banking – as banks collapsed, so did the money supply – and so did prices.
The bank failures were greater in some sections of the country than others, but again the Fed refused to intervene (often there had been a housing price bubble, and the sentiment was that they took the risk; they deserve to fail – sound familiar?)
We had a very local banking system back then – some states prohibited any branching; nowhere was multi-state banking permitted. So when these banks started to go, there was no back up (well, the Fed was supposed to be the backup but the Fed refused).
Canada, in contrast, had a national banking system. Banks did not fail over local crises, and in general Canada weathered the storm much better than the U.S.
The bank holiday was not such a good idea because of the banks that failed while closed – BUT, the FDIC was one of the smartest moves the fed govt ever made. With a minimum cost, it assured the public it was safe to take your savings out of the mattresses and put them back in banks, which could then lend again.
Banks were regulated for decades after that – but in the last quarter century new institutions have sprouted to get around regulation.
FOUR-FIFTHS of all mortgages in the past decade were NOT made by regulated banks, but by unregulated mortgage companies.
It has also been stunningly unwise to allow the development of linked mortgage companies and real estate developers.
Finally there is nothing intrinsicly wrong with bundling mortgages for sale – Fannie Mae has been doing it since 1938 – along with the standard of no mortgage greater than one-fourth of your gross income or one-third of your total debt – plus there had to be a down payment of 20%.
It was allowing unregulated companies into a market that the public thought was regulated, and the concurrent relaxation of standards, that led to today’s housing crisis.
And we have to go back and fix it by renegotiating the mortgages – which can of course be done, no matter how sliced and diced the instrument.
When the depression first started, old Progressive Republicans in Congress seized on the opportunity to create the TVA (Tennessee Valley Authority), bringing electricity to rural areas while bringing jobs to the unemployed. The rest of the Republican Party was furious.
The Bonus Army, for those who didn’t know, was simply an effort by WWI vets to get their promised old-age bonus a couple of decades early – they did not see it as a handout, but as something Congress had already voted to go into effect when they aged – they thought surely in this emergency, no one could object to giving them the bonuses early. But Congress and Hoover did – and then the army was turned on their shantytown and they were brutally forced out.
The objection of Hoover and others in the Republican party to the TVA (for being “socialistic”), and the brutal treatment of our WWI vets and their families pushed the old Teddy Roosevelt – Progressive Republicans over to FDR’s side, and that’s how he could get so much passed.
The refusal of any Republicans to compromise places Obama in a tougher position. Perhaps they should reflect upon why shantytowns were called “Hoovervilles.”
I find it an interesting coincidence that New Orleans and large parts of the Gulf have been left decimated by hurricanes. Extended families and a thick social network in a city with 85% retention rates were destroyed – just as farmers in the plains states beset by dust storms and locusts were evicted from their homes and left to wander to the west, destitute.
WWII finally ended the Great Depression with immense government spending – we have always been willling to spend anything for war but reluctant to spend on our own citizens.
WWII also effected some very important structural changes. People left the poverty-ridden South – young men went into the armed services, and their families moved to the north and the west, where defense jobs led to a booming economy.
Women entered the labor force in large numbers, and altho the stereotype has it that they left to “nest,” roughly half of the women who entered the job market for the first time stayed there – albeit in lower paying jobs.
Both factory work and participation in the armed services got workers trained for the new growing industries such as autos and electric appliances.
The fed govt started spending large amounts on open-ended medical and scientific research (especially after the Cold War started), and the G.I. Bill not only sent people to college who would never have thought that possible, it also kept returning servicemen for competing for jobs and returning to a recession.
Fearful that “Ivan” was better educated than “Johnny,” we would pour money into education, particularly science and math. Public universities were able to offer tuitions that would seem unbelievably low today (after adjusting for inflation). Education matters – and in unpredictable ways. Those four kids who put on suits and ties and sat down in a Greensboro 5 & 10 cent store – refusing to leave although it was illegal for them to sit there – they were college students, affected not only by their parents’ hardships but also by philosophy classes.
Finally, we came out of WWII with a very progressive tax structure in place. The HIGHEST bracket – incomes over $1 million – was set at 95% in WWII. Today the wealthiest Americans whine at the prospect of raising the highest tax bracket to 45%.
I have always thought that there was an intangible benefit to WWII – a sense of unity. Maybe that’s romantic, but guys of all income brackets volunteered for that war, and the experience changed them.
So – what are the lessons?
First, it will take ENORMOUS spending to keep this from becoming a Great Depression that could last a decade. It’s unfortunate that it has come after a drunken spending spree, but we have no choice.
Second, the wealthy have to help their compatriots in their time of need. We need a progresive income tax – and a flat FICA tax on all sources of income (drop the business portion to ease up on small businessses) – what kind of a nation leaves invalids and the severely disabled and the very old and the very young impoverished and uncared for?
Third, we are in sore need of a return to regulation – to oversight – and we can’t let ill-advised lending pull us down deeper. We need to renegotiate mortgages – and we need to go after student loans and credit card debt, too. With student loans, we need to find ways for kids to volunteer and get those loans off their backs. With credit cards, we need to make it easier to pay down the principal and end usurious credit card interest rates. (They were reasonable when we had double-digit inflation – they have not been reasonable in a long time.)
Then, just like we did in WWII, we have to look at what’s needed and pay people to do it – day care, after school care, educational opportunities for those past school age who never got a real education, extracurricular activities beyond sports, clinics, social workers, visiting nurses, housing, medical education, more doctors, more nurses, more cops walking the beat, in addition to the infrastructure investment that gets so much attention.
Also research in science, technology, and medicine needs to be open-ended. NIH can no longer allow petty dictators to control all spending for specific diseases – or, if no one wants is, NO spending for other diseases.
And if you won’t join us in this most important national task, then get out of the way”.
NB: I am an economic historian but have not been able to work since 1994 due to a chronic debilitating condition – and, as an aside, if I did not have family to take care of me, I would be on the streets, dying.