| |
To understand the Great Depression, it is important to know the theories of John
Maynard Keynes (rhymes with "rains"). Keynes is known as the "father of
modern economics" because he was the first to accurately describe some of the causes
and cures for recessions and depressions.
In a normal economy, Keynes said, there is a circular flow of money. My spending becomes
part of your earnings, and your spending becomes part of my earnings. For various reasons,
however, this circular flow can falter. People start hoarding money when times become
tough; but times become tougher when everyone starts hoarding money. This breakdown
results in a recession.
To get the circular flow of money started again, Keynes suggested that the central bank --
in the U.S., the Federal Reserve System -- should expand the money supply. This would put
more money in people's hands, inspire consumer confidence, and compel them to start
spending again.
A depression, Keynes believed, is an especially severe recession in which people hoard
money no matter how much the central bank tries to expand the money supply. In that case,
he suggested that government should do what the people were not: start spending. He called
this "priming the pump" of the economy. Indeed, most economists believe that
only massive U.S. defense spending in preparation for World War II cured the Great
Depression.
After its success during the war, almost all free governments around the world became
Keynesian. Its policies have dramatically reduced the severity of recessions since then,
and appear to have completely eliminated the depression from the world's economies.
Events of the 1920s
The Roaring Twenties were an era dominated by Republican presidents: Warren Harding
(1920-1923), Calvin Coolidge (1923-1929) and Herbert Hoover (1929-1933). Under their
conservative economic philosophy of laissez-faire ("leave it alone"),
markets were allowed to operate without government interference. Taxes and regulation were
slashed dramatically, monopolies were allowed to form, and inequality of wealth and income
reached record levels. The country was on the conservative's preferred gold standard, and
the Federal Reserve was not allowed to significantly change the money supply.
The fact that the Great Depression began in 1929, then, on the Republicans' watch, is a
great embarrassment to conservative economists. Many try to blame the worsening of the
Depression on Hoover, for supposedly betraying the laissez-faire ideology. As the
time line in the next section will show, however, almost all of Hoover's government action
occurred during his last year in office, long after the worst of the Depression had hit.
In fact, he was voted out of office for doing "too little too late." The only
notable exception to his earlier idleness was the Smoot-Hawley tariff of 1930, whose minor
impact we shall explore in more detail later on.
But much more importantly, the economy was clearly turning downward even before Hoover
took office in 1929. Entire sectors of the economy were depressed throughout the decade,
like agriculture, energy and mining. Even the two industries with the most spectacular
growth -- construction and automobile manufacturing -- were contracting in the year before
the stock market crash of 1929. About 600 banks a year were failing. Half the American
people lived at or below the minimum subsistence level. By the time the stock market
crashed, there was a major glut of goods on the market, with inventories three times their
normal size.
The fact that all this occurred even before the first act of government
intervention is a major refutation of laissez-faire ideology.
|