As documented in Rothbard’s classic book, America’s Great Depression, the similarities of the 1920s and 2000s did not end with the beginnings of each crisis in 1929 and 2008, respectively. It gets much scarier than that. Washington responded in very similar ways to both crises. As we know, Hoover/Roosevelt policies made the recession of 1929 into a depression and prolonged recovery for at least a decade. Only time will tell how bad Bush/Obama policies will make our current economic depression.
So, just what were the policies of the Hoover/Roosevelt administrations that exacerbated the U.S. economy into the 1930s and which resemble the policies of the Bush/Obama administrations today? For one, a blatant misinformation scheme was launched to make Americans believe that the excesses of laissez-faire capitalism were to blame for the economic downturns. In both cases, this was used to deflect any culpability of the U.S. government for the crisis. But, also and more importantly, it was used as the rationale for heavier government intervention in the economy. It is ridiculous that then and now the American public has fallen for this deception. We did not in the 1920s, and we did not earlier in this decade, have a laissez-faire economy in the United States. As Rothbard points out, just prior to the 1920s, America went through the so called Progressive Era. This era introduced enormous regulations on our economy. There was price fixing, a full blown agricultural policy and interstate commerce regulation through the Interstate Commerce Commission and other government agencies. Let’s not forget that the Federal Reserve Bank began operations in 1913 with the express mission of preventing economic downturns through currency regulation.
Of course, many regulations and regulatory agencies founded during the Great Depression are still with us today. Because we are no longer on the gold standard, the Federal Reserve has even more power today than in the 1920s to regulate our money supply. The bottom line is that laissez-faire means no government interference in the economy, but Washington has had its grubby big hands on our financial system for a long time. Therefore, Washington’s attempt to blame laissez-faire for economic troubles in this country, ever, is highly disingenuous.
But, the politicians have used this pretense since the Great Depression to step in and “rescue” our economy from the “greedy capitalists.” After the stock market crash of October 1929, the Federal Reserve pumped $300 million into the reserves of the nation’s banks. It expanded its balance sheet by purchasing $1 billion of government securities and provided $200 million more to banks at discounted rates. Sound familiar? These numbers are nothing compared to what the Fed and treasury have spent on the current crisis ($12 trillion), but they were a lot, given the nation’s GDP at the time was $100 billion. The scary thought is that by the time Hoover left office, his attempt to re-inflate the bubble produced a 25 percent unemployment rate. What will $12 trillion produce?
Additionally, government works projects were used by Hoover/Roosevelt and are about to be used by Obama. Hoover raised taxes on the rich and Obama has threatened to do the same by allowing Bush’s tax cuts to expire. Fortunately, a major policy difference between then and now is that Washington has not passed protectionist measures in the current crisis, though it came close with “buy America” clauses in the stimulus bill. Nonetheless, the comparisons in policy are startling, given they didn’t work the first time.
Beyond the policy similarities, there are at least two chilling coincidences between then and now. In 1931, almost two years after the crash, the unemployment rate was only 9 percent. One and a half years after the current crisis began unemployment is 8.9 percent. But, more ominously, given Hoover’s inflating of the money supply banks didn’t lend, and consumers were not spending, in 1932. Naturally, the short term deflation that resulted improved the economy for a while, because it began to deflate the credit bubble, which the economy needed to recover. However, it was only a matter of time before all the new money hit the economy and caused havoc. One year later, the unemployment rate soared to 25 percent.
Again, today, in spite of the Fed’s pumping of new money into the economy, banks have been slow to lend and consumers slow to spend. Prices have declined over the past 12 months – for the first time since 1955. You might say the economy is showing signs of improvement – the stock market is up 25 percent in the last two months. However, since government intervention caused the Great Depression, don’t be too hopeful that Washington’s current intervention will have any different outcome this time.
It is amazing that in both crises the same folks who caused the problem were called upon to solve it. The easy money policies of the Fed have been responsible for both the Great Depression and our current economic crisis. After the 1929 stock market crash, the Fed’s re-inflating policies did not allow the economy to rid itself of the malinvestments caused by its previous inflating. The economy sank into a deep depression. According to Rothbard, we are headed for a similar, if not worse, fate. If only Ben Bernanke had read Rothbard as a part of his study of the Great Depression.