The Great Depression Pt. III

In Part I of this series, New Deal Democrat and I looked at the years 1929 - 1933. These years saw a decline of 25% in the chained GDP figures; a failure of 20% of commercial banks, a drop in personal income from $90 billion to $50 billion and a drop in the level of industrial production from 60 to 30.

In part II we looked at the years 1934 - 1940, where we saw that growth returned to 1929 levels in 1937, although this was lowered by the recession of 1938. By 1939 GDP was again increasing. In this article, we will look at what happened statistically and practically during the years of 1934 - 1938.

"I was laid off in '31. I was out of work for over two years. I'd get up at six o'clock every morning and make the rounds. I'd go around looking for work until about eight thirty. The library would open at nine. I'd spend maybe five hours in the library." .... "I can remember the first week of the CWA checks. It was on a Friday. That night everybody had gotten his check. The first check a lot of them had in three years. Everybody was out celebrating.... Everybody was so happy, you'd think they got a big dividend from Xerox." "I never saw such a change of attitude. Instead of walking around feeling dreary and looking sorrowful, everybody was joyous. Like a feast day. They were toasting each other. They had money in their pockets for the first time. If Roosevelt had run for President the next day, he'd have gone in by a hundred percent." - Hank Oettinger, as told to Studs Terkel, "Hard Times"

Let's start with government spending. The government ran a deficit for these years. Here is a chart from the St. Louis Federal Reserve.

The blue line represents government expenditures and the red line represents government receipts. In addition, the amount of national debt tripled. However, remember that in the second installment of this series we learned the economy grew at strong rates from 1934 - 1937, returning to 1929 levels by 1937. As a result,

in 2000 chained dollars, government spending as a percent of GDP fluctuated between 18% and 21% for the years 1929 - 1933. In addition,

Federal debt as a percentage of GDP remained around 40% for the entire decade. By modern standards this hardly shocking. By standards of he 1930s it was very controversial.

Whether or not the increase in government spending as a percent of GDP is good or bad is a judgment call and is an issue that is still hotly debated today. In my opinion it was warranted. The country was in the middle of a deflationary spiral. Older school economic ideas were not working. In addition, with unemployment over 20% by 1932 something had to be done to prevent civil unrest.

So -- what did happen? Let's answer that with this explanation about what makes a country tick. GDP is composed of four categories: consumer spending, net private investment, exports and government spending. What we see of the decade of 1929 - 1939 is a decline and the return of both private investment and consumer spending:

First, here is a graph of personal consumption expenditures in 2000 chained dollars for the years 1929 - 1939:

Notice that by 1936, PCEs total $677 billion in chained 2000 dollars, which is slightly higher than the $661 billion total from 1929. In other words, people started spending again.

Secondly, here is a chart of total private investment in 2000 chained dollars from 1929 - 1939:

Notice that gross private domestic investment dropped from the years 1929 - 1933, but returned to 1929 levels by 1937. The levels dropped again in 1938 (due to an increase in banking reserves, see below), but rebounded in 1939. The reason for the 1929 - 1933 drop is the deflationary spiral that gripped the country in 1929 - 1933 (see part I). (see also page 5 from Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Returned After the War," which shows the same information)

As Paul Krugman explained in the video clip of part II, there is no reason to invest when unemployment is at 20% and there is a ton of idle capacity around the country. But as demand picked-up in the 1933-1937 years, private investment did as well.

Let's look at this information from another angle. Below are charts composed with information from the Bureau of Economic Analysis. The chart is for the years 1930-1934. Remember the GDP categories from above -- consumer spending, net investment, exports and government spending. Each "cluster" of bars shows several things. The bar on the far left (in blue) is the total GDP gain or loss for the year. The bar next to it (in purple) shows the increase or decrease in personal consumption expenditures. The white bar shows total private domestic investment. These bars show how much of the GDP gain or loss was caused by a particular sub-category. For example, in the cluster farthest left GDP dropped 8.6%. The bar next to it shows that personal consumption expenditures were responsible for about 4% of that 8.6%, or about 46% of the drop in total GDP for 1930.

The point to the above chart is to demonstrate large drops in personal consumption expenditures and investment were responsible for most of the drop in GDP for the years 1930 - 1934.

Let's look at each year of the 1934 - 1937 to see what they say:

In 1934 the economy grew at a 10.8% (that is inflation adjusted). Of that figure, 5.71% came from PCEs and 2.78% came from private investment. In other words, 52% of growth came from consumer spending and 25% came from investment. 18% of growth came from government spending.

In 1935 the economy grew at an 8.9% (that is inflation adjusted). Of that figure, 4.81% came from PCEs and 4.51% came from private investment. In other words, 54% of growth came from consumer spending and 50% came from investment. 4.83% of growth came from government spending.

In 1936 the economy grew at a 13% (that is inflation adjusted). Of that figure, 7.74% came from PCEs and 2.53% came from private investment. In other words, 59% of growth came from consumer spending and 19% came from investment. 19% of growth came from government spending.

In 1937 the economy grew at a 5.1% (that is inflation adjusted). Of that figure, 2.75% came from PCEs and 2.58% came from private investment. In other words, 54% of growth came from consumer spending and 50% came from investment. Note the government spending provided a negative stimulus that year.

Then came 1937-1938 recession. Why did this happen when things were going so well? There are several contributing factors:

1.) Beginning mid-way through 1936 and continuing through 1937 the Federal Reserve raised the reserve requirements for central reserve city banks from below 15% to 25% (see Friedman's Monetary History of the US, page 513. See page 526 "Our conclusion, expressed above, is that the increase in reserve requirements did have important current effects.")

2.) As Krugman pointed out in the clip from the second part of this series, the government balanced the budget in 1938. The government raised taxes at an inappropriate time.

3.) An inventory build-up caused "by a general impression, among business men, that "inflation" might be coming and that one had better buy before it was too late....When the purchasing power came to sell these goods at retail to the public, the purchasing power to absorb them just wasn't there." (From Since Yesterday, by Frederick Lewis Allen).

Increased bank reserve requirements along with a change in the fiscal situation combined to create a recession.

As with the Great Contraction of 1929-33, while the graphs may tell the technical story, underlying them is the story of a government trying just about everything it can think of to steady and then expand the economy to the benefit of the vast majorit of its citizens. There were a blizzard of New Deal programs and agencies focused on immediate Relief of the afflicted, Recovery of the economy, and Reform to attempt to ensure that the Great Depression could not happen again. To try to fully appreciate the broad scope of that effort, here is a partial list and explanation of important New Deal programs. Remember that many of these are what the RW noise machine wants to claim actually delayed recovery from the depths of the Depression:

RELIEF

The Federal Emergency Relief Act (1933) established the Federal Emergency Relief Administration (FERA) and gave it half a billion dollars to distribute to the states for any relief they felt necessary. Half was for matching grants, with the states contributing three dollars for every dollar of federal funds. The remainder could be given in direct grants. At one point, as many as 6 million families were on direct relief.

The Emergency Banking Relief Act (1933) established a system to close down insolvent banks and reorganize and reopen those banks strong enough to survive, after a mandatory four-day bank holiday that took place immediately after Roosevelt took office. Within 300 days of the act's passage, 5,000 banks had passed inspection and were reopened. Roughly two-thirds of U.S. banks quickly reopened under this act, and faith in banking institutions was restored, with money flowing out from under mattresses and back into financial institutionas as deposits. The act also allowed the confiscation of the gold of private citizens. The US dollar was then devalued by approximately 40%, ending the deflationary spiral of the Depression.

The Unemployment Relief Act (1933) established the Civilian Conservation Corps, a work relief program for young men ages 18-25 from unemployed families. The CCC became one of the most popular New Deal programs among the general public and operated in every U.S. state and several territories in 2600 work camps. The young men were paid wages, but were expected to share their wages with their families. They built such things as fire trails, camp sites in parks, and also cleared swamps and planted trees. Here are some CCC recruits about to leave for Montana:

The Public Works Administration (1933) allowed $3.3 billion to be spent on the construction of public works to provide employment in the construction and building industries, and to stabilize purchasing power,

The Home Owners Refinancing Act (1933) helpeds those in danger of losing their homes, by providing mortgage assistance to homeowners or would-be homeowners by providing them money or refinancing mortages. It also created the Home Owners' Loan Corporation (HOLC), which lent low-interest money to families in danger of losing their homes to foreclosure. By the mid 1930s, the HOLC had refinanced nearly 20% of urban homes in the country.

The Civil Works Emergency Relief Act (1934) allotted new funds for Federal Emergency Relief Administration to run new programs of civil works and direct relief. In 1935 it became the Works Progress Administration (1935) and was the largest New Deal agency, employing millions of people and affecting most every locality in the United States, especially rural and western mountain populations. Between 1935 and 1943 the WPA provided almost 8 million jobs and income to the unemployed. The program built many public buildings, projects and roads and operated large arts, drama, media and literacy projects, employing actors, artists, musicians, and writer (nearly 4 million in 1936 alone). It fed children and redistributed food, clothing and housing. Almost every community in America has a park, bridge or school constructed by the agency, and most public buildings of a certain age will feature architecture or a mural created by one of its artisans:

RECOVERY

The National Industrial Recovery Act (1933) legalized cartels and funded massive government spending on public works through the PWA. The NIRA operated under codes for each industry, all of which were written by committees of businessmen from the specific industry involved. Including all sorts of subcodes, rules, and regulations, the Act's proscriptions were enormously complex. The entire purpose was to eliminate unemployment and raise wages. In general - NRA codes limited production, had common control of prices and sales practices, outlawed child labor, and established a 40 hour work week and minimum wage.

The Agricultural Adjustment Act (1933) restricted production by paying farmers to reduce crop area. Its purpose was to reduce crop surplus so as to effectively raise the value of crops, thereby giving farmers relative stability again (in the past, wild swings in prices, particularly precipitous drops due to overproduction, could bankrupt a family farm during a single year). The farmers were paid subsidies by the federal government for leaving some of their fields unused.

The Tennessee Valley Authority (TVA) (1933) provided and still provides navigation, flood control, electricity generation, fertilizer manufacturing, and economic development in the Tennessee Valley, a region particularly impacted by the Great Depression, with a goal of rapidly modernizing the region's economy and society.

The Rural Electrification Act (1936) provided federal funding for installation of electrical distribution systems to serve rural areas of the United States. In the 1930s, the provision of power to remote areas was not thought to be economically feasible and so was largely unavailable in rural areas of farms and ranches. A 2300 volt distribution system was then used in cities. This relatively low voltage could only be carried about 4 miles before the voltage drop became unacceptable. REA cooperatives used a 6900 volt distribution network, distributed over their own network of transmission and distribution lines. which could support much longer runs (up to about 40 miles). Despite requiring more expensive transformers at each home, the overall system cost was manageable.

REFORM

The Glass-Stegall Banking Act (1933) introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Company for insuring bank deposits. It also increased the power of the Federal Reserve Board to regulate interest rates.

The National Housing Act (1934) made housing and home mortgages more affordable. It created the Federal Housing Administration (FHA) and the Federal Savings and Loan Insurance Corporation. It was designed to stop the tide of bank foreclosures on family homes. Both the FHA and the Federal Savings and Loan Insurance Corporation worked to create the backbone of the mortgage and home-building industries.

The Securities Acts (1933 and 1934) governs the offer or sale of securities using the means and instrumentalities of interstate commerce, and requires that they be registered; and also governs the secondary trading of securities (stocks, bonds, and debentures). Contrasted with the Securities Act of 1933, which regulates these original issues, the Securities Exchange Act of 1934 regulates the secondary trading of those securities between persons often unrelated to the issuer.

The National Labor Relations Act (1935) protects the rights of most workers in the private sector to organize labor unions, to engage in collective bargaining, and to take part in strikes and other forms of concerted activity in support of their demands.

The Social Security Act (1935) established a system whereby payroll taxes, first collected in 1937, that paid for lump-sum death benefits and also, beginning on January 31, 1940, monthly retirement benefits.

Altogether these enactments guaranteed two important things to the economy and to society: first, as shown in the graphs above, that the deflationary spiral of wages and prices had stopped, meaning that future income and the ability to pay off new loans could be reasonably assured, and spending could begin again; and secondly and just as importantly, despair was replaced with hope and confidence for the future.

Even now, facing a not dissimilar meltdown in global finance, the surviving reforms of unemployment insurance, collective bargaining, securities law and Social Security are the strongest bulwarks separating us from a similar abyss.

CORRECTION: A posted below noted the graph from page 5 of Higgs paper does not show an evening out of investment in 1937. This is correct; that graph does not show that. However, information printed above from the BEA contradicts Higgs assertions and shows that investment did return to 1929 levels in 1937. In addition, Higgs provides a second graph on page 6 which (in his words) "avoids the distortions potentially effecting data shown in exhibit 1". This graph shows investment as a percent of GDP at 16% in 1929 and 14% in 1937. This graph uses current dollar numbers. In other words, Higgs admits his first graph may provide distortions and then provides a graph far closer to the BEA's information.

Additionally, Higgs' first graph is in 1987 dollars. It shows GDP returning to 1929 levels in 1937. This is the same pattern as expressed in 2000 chained dollars. However, Higgs finds 1929 investment at levels far higher than 1937 levels which does not occur with the 2000 chained data presented above -- a fact which is also contradicted by his second graph which "avoids the distortions potentially effecting data shown in exhibit 1".

Comments

[realpolitic]

Bonddad, perhaps the National Industrial Recovery Act may have later developed myriad rules and regulations that may have had an unintended consequence of making the rules too complex for business to easily follow and then this complexity may have slowed business recovery. Can you comment on this program or any others which may have had unintended consequences.

[TimmySlagle]

"As Paul Krugman explained.­.. there is no reason to invest when unemployment is at 20% and there is a ton of idle capacity around the country. But as demand picked-up in the 1933-1937 years, private investment did as well."

Krugman is wrong. There is always a reason to invest. People do not invest money to build factories, they invest money to make money. That impetus is always present, since money that is not invested, evaporates from inflation.

There were plenty of investment opportunities in the thirties. The idled factories were those most in need of modernization, since the more efficient plants were still producing. Technology was increasing at a rapid pace, Electronics was a budding industry, Aviation was in it's infancy, and coal was being replaced by oil.

High unemployment does not discourage investment. To the contrary, it is good for business. High unemployment means there is a much greater talent pool available, and those fortunate enough to get the jobs will work harder for less money.

There had to be a reason why capital was afraid of the market, and the New Deal is a likely culprit. Roosevelt was hostile to industry.

When you cite the 1937 increase in private investment, you can't discount the series of Supreme Court decision, overturning the New Deal. Beginning with Schechter Poultry Corp. v. United States, which declared the National Recovery Administration unconstitutional in 1935, much of the New Deal had been dismantled by the Court by 1937.

[research]

We should follow conservatives advice, Why?

[realpolitic]

Their advice would likely be to let the business cycle take it path. Even Bernicke and Paulson did not want that inaction to take place in the current downturn as they were afraid credit markets would seize up and the economy would collapse.

[DuganS1]

Yes. And as I've explained several times, private investment is a leading indicator while unemployment is a lagging indicator. Business investment typically picks up at the bottom of economic cycles in anticipation of the next business upturn. If unemployment is 20%, people/businesses invest because they believe things will get better and they'll be able to make good returns on their investments in the future. Maybe Krugman doesn't understand this because he's an academic, not an investor.

[TimmySlagle]

"he's an academic, not an investor"

Absolutely. He deals with the theoretical, rather than the concrete.

It's much easier to wax philosophically, when it's just marks on the chalkboard; lines on a balance sheet have much graver consequence.

[realpolitic]

Mr. Dugan, have you heard of the business confidence index or the consumer confidence index. They are measures of the state of the economy from the perspective of if one is in business or a consumer. A business person is not going to invest at the bottom of a cycle of poor business confidence and will hold off until he sees the environment improving. They are not practicing altruism, they want to make profits. In a deflation spiral with exceedingly high unemployment (therefore no purchasing power) who will invest? That is the idea behind government stimulus until investment picks up.

You say, "If unemployment is 20%, people/businesses invest because they believe things will get better .." Why, necessarily? I think you are much too optismistic, especially in hindsight.

Here is a tracking of present business confidence. "An index that tracks business confidence in Massachusetts fell to an all-time low in December as businesses fretted about a severe and protracted downturn..­..Conditio­ns within Massachusetts are not as bad at this point as they were in 1991-92, but in a larger context, the national and global economic crisis is unprecedented in the post-World War II era.”


http://www.boston.com/business/ticker/2009/01/local_business.html

[realpolitic]

One notices when facts do not go the way conservatives like them to go, as is most often the case, they always revert to their familiar tactic of attacking the messenger. It never fails!! Here Slagle and company attack Krugman. In other threads, he attacks environmental scientist James Hansen. It is always the same.

[realpolitic]

3)

Thirdly, Slagle claims high unemployment is good for business. Well, this assertion is ridiculous on its face. If one wants to start a bakery in a neighborhood where most people are out of work it is not a good idea because no one can afford to buy your bread. How can a company sell goods or services when most people are out of work and do not have money to buy and banks will not lend money either because they already have already made a number of bad loans?

Finally, Slagle says there "has to be a reason that capital was afraid of the market." Except when one looks at what occurred between 1929 and 1932, then one sees that capital taking flight before New Deal programs took place. There were Hoovervilles, there was the Dust Bowl, there were incredible extremes of wealth, there were thousands of bank failures where people lost their life savings, and no social safety net at all when FDR entered office. Only a confirmed conservative historical revisionist can ignore all these realities.

[TimmySlagle]

"How can a company sell goods or services when most people are out of work"

But unemployment was only 25%. "most" people were still working.

[realpolitic]

Yes, Timmy says only 1/4 of the population who was looking for work was out of work and most then were employed. And how many at the time had dropped out of the workforce entirely and were no longer looking and so were not counted in the unemployment figures. I guess if conservatives think that 25% unemployment is good for business conditions, it is no wonder the Bush economy has done so well. The more unemployed the better for business conditions, until no one has a job and then business conditions are ideal!

[realpolitic]

2)

"The liquidation of debt could not keep up with the fall of prices which it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed. This self-aggravating process turned a 1930 recession into a 1933 great depression­."



http://en.wikipedia.org/wiki/Great_Depression

2) He then says that there were plenty of investment opportunites. However, in a deflationary environment it is always cheaper to hold off on the modernization of factories because it is getting cheaper to do as time goes on. Also, it was likely difficult to get a loan for modernization as the depression dragged on.

"With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures.­"

http://en.wikipedia.org/wiki/Great_Depression

[TimmySlagle]

"This self-aggravating process turned a 1930 recession into a 1933 great depression"

We are talking about the Roosevelt Era. Hence, anything before 1933 is irrelevant.

"Also, it was likely difficult to get a loan for modernization as the depression dragged on"

Exactly. Because nobody wanted to invest. That is the point I've been trying to make.

[realpolitic]

1)

Slagle makes several errors in his above analysis. (Slagle also believes global warming is a vast conspiriacy among scientists to redistribute wealth and that second hand smoke causes no ill health effects, despite what the EPA tells us.)

1) First he says Krugman was wrong and that there is always money to invest, otherwise it evaporates from inflation. However, one of the main causes of the Great Depression was that there was an deflationary spiral. In other words, the cost of goods were getting cheaper as money was getting tighter. Therefore, people put off purchases. The real value of one's debts increased over time.

"Bank failures led to the loss of billions of dollars in assets. Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount."

[Sundialsvc4]

Hale, let's re-draw a few of those nice, well-researched graphs of yours...

"Government Spending" has to be drawn in the negative direction. It does not properly belong as part of "Gross Domestic Product," because the Government has no money to spend other than what it (sic...) "borrows from itself" or collects as taxes and tariffs.

Throughout all of the grand New Deal recovery plans that you speak of, the money that was used to create and to finance those programs largely did not come from taxes nor tariffs; it came from deficit spending. Therefore, "dollars were created," out of nowhere at all, and dumped into the economy. After World War II came and went, this practice became a permanent fixture.

What did "Ike" Eisenhower have to say about that?

"Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed."

The notion that "government spending" is a part of "national PRODUCT" is an illusion that the occupants of the Beltway cling-to quite grandly, because the Power is theirs alone to control.

The true power of Government is not to be "an endless source of liquidity," which it is not and can never be, but rather "to regulate..­. to establish, and to enforce, the Rules of the Game." That seems to pale in importance to "being Uncle Sugar."

[realpolitic]

Government spending is only deficit spending when the government is spending more than they are taking in in taxes. Eisenhower was talking of the military-industrial complex and how military spending reduces society's capacity to take care of its own. FDR was trying to use the government's resources to care for the poor and sick. Eisenhower just echoed that concern. Many conservatives do not want government spending on the hungry and unclothed, but always want an increased military budget.

[slarabee]

What a concept. If consumers are to be able to consume they must have jobs and sufficient income to support that consumption. Not really a physics level concept. Just common sense. Just ask anyone who is poor and they will explain it to you.
Eventually greed unchecked always causes mass suffering.
The greed of the 1980's had us headed for where we are now. The Information technology boom of the 1990's gave us a reprieve but when that leveled off we were left with very little to sustain us because ultra rich self serving puss balls had shipped our manufacturing base out of the country where labor was cheap. They got away with it by convincing the American public that the Unions and the workers wages were to blame. They fight even minimum wage increases. The rampant greed I have witnessed in this country since I became old enough to grasp the concept defies the imagination. The housing market boom was easy to read as a bust because a home is the largest single investment of a lifetime for middle class working people. How are they to pay for these homes without sufficient income?
Very little real industrial investment has occurred here (comparatively to previous eras) and the end result is a lack of employment and an unwillingness by the rich to invest in the very economy that they themselves soured.
"Let them eat cake they say."

[ApolloSpeaks]

You say that the 80s were a decade of greed and the 90s because of the information boom gave us reprieve from greed and became the age of virtue? The rising wealth of the information boom made the greedy rich richer still and added multitudes to their ranks. As for today's financial crisis it is a blatent case of government misregulating and misdirecting banks and financial institutions to destructive ends; fanning, or Fannie Maeing, avarice into a financial conflagration that hasn't been extinguish­ed..

[slarabee]

I did not say the 90's was "an age of virtue" in any way shape or form. I did say that it gave us a reprieve;

re⋅prieve
–verb (used with object)
1. to delay the impending punishment or sentence of (a condemned person).
2. to relieve temporarily from any evil.
–noun
3. a respite from impending punishment, as from execution of a sentence of death.
4. a warrant authorizing this.
5. any respite or temporary relief.

The government has undoubtedly created an environment where greed is unchecked and so banking systems run amok, as well as private financial institutions. Ultimately it is all caused by greed. it is a simple equation. It is not rocket science.

[DuganS1]

Lack of employment? There have been historically lower unemployment rates for the past 20 straight years. US industrial production, in which manufacturing makes up 78%, saw an increase of 49% from 1993-2005, and hit all time highs in 2008. Manufacturing had been strong from 2006 until August this year, much to do with exports and the global commodity boom. Many people blame NAFTA for lost factory jobs, but the actual number of jobs lost from factories closing up and moving to Mexico has been very very small relative to the size of the economy and the dramatic net increase in jobs in the US since NAFTA was signed. Many of the manufacturing jobs lost this decade have been in textiles/a­pparrel/fu­rniture. I do agree with you, however, that we need to focus on strengthening our manufacturing base. President George W Bush tried dealing with this by devaluing the dollar, which was working and manufacturing investment had been strengthening dramatically in 2007 and 2008 as the dollar weakened.

[realpolitic]

Bush just devalued the dollar by his profligate spending and borrowing. He was not trying to deal with increasing our manufacturing base. Man, are your analysis lopsided toward conservatives! Bush spent and borrowed on unneccesary wars and the dollar plunged. You have got to be kidding!

Next tell us how well the economy is doing at the moment!

[slarabee]

George W. Bush believed that exporting jobs overseas was good for us.

I guess I should have said GOOD jobs. Working for 7 to 8 dollars an hour is poverty.

[slarabee]

Those of course came straight from Wikipedia's Great Depression Page and are quotes from;
Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from November 1934 to February 1948, detailed what he believed caused the Depression in his memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951)

[slarabee]

"The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression­."

[slarabee]

and;

"That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929."

[slarabee]

I am no economist but this makes the most sense to me so far;

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery.­"
"Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

And sounds disturbingly familiar.

[DuganS1]

The problem this decade has been over-consumption now under-consumption. And evidence from the data in the 1920s, especially with the explosion in the purchases of consumer goods, shows much of the same.

[slarabee]

True enough. That under-consumption is caused by dramatic shift of wealth to a very small percentage of the population that does not reinvest in the workforce (either through higher wages or new jobs). If the masses have no money to spend (or no confidence to spend) there is under-consumption. In the end it all comes down to greed. No way around it.

[realpolitic]

Dugan, you are speaking of the boom times of the 1920s. She is speaking of when the consequences of the massive speculation came hold to roost. The market can only keep going up in times of such massive speculation and leveraging ratios when there is additional funds to flow into the market. Once the liquidity starts to dry or some concern of high values creeps in, the whole house of cards falls. This scenario was the consequences of the boom times of the twenties. The market crashed, a run on banks resulted, credit dried up, the value of debts increased, panic resulted. Why is it so difficult to understand?

[realpolitic]

Thanks for the quotes!!!

[larry278]

FAUX NOISE may not collect & edit the trolls's comments on Bonddads 4 part series on the Depression & our economy. Somebody ought to do it though so trolls can easily fog the discussion even if they can't refute Bonddad's arguments. There will be similar blogs because the history of FDR's New Deal is well documented. Not everyone who will agree with Bonddad will have plagarized Bonddad's works. I recall hearing some of the same things in survey courses on economics.
Maybe somebody will argue that Bonddad's findings are CW. I doubt if everybody knows of these findings & opinions. This is the start of an interesting conversation. I'm waiting for Part IV.

[DuganS1]

I don't think anyone is claiming the New Deal pulled us out of the Depression. We were still in depression from 1934 through 1938. Here's what Wikepedia says:

"The end of the depression in the U.S is associated with the onset of the war economy of World War II, beginning around 1939."

Library of Economics:

"The American economy had yet to fully recover from the Great Depression when the United States was drawn into World War II in December 1941."

The economy did, however, recover from the worst of the Great Depression (the trough) of late 1932/early 1933, but the economy nearly dropped back to those low levels in 1938. The big issue is how badly FDRs numerous anti-business policies adversely impacted private investment (which remained weak throughout the entire period, even with absolutely massive govt stimulus).

[realpolitic]

Well, the depression may have been so massive an economic spiral it took the war to pull us out. As FDR said he would try almost anything, some programs may have had unintended consequences. To nit pick now on which programs did not work has the value of hindsight being 20-20. FDR inherited an economy that was near an insurrection in terms of food results. He laid the basis of our modern foundation of prosperity through the social security program, unemployment insurance, the SEC, and the federal reserve. Strong unions were a basis for our future prosperity as working conditions were sometimes life threatening. Have you read The Jungle by Uptown Sinclair?

[Thermodynamics]

I have a nightmare scenario: Imports might soak up the stimulus.

In the 1930s the consumables were mostly produced in the US. Government spending allowed Americans to buy goods produced in America. Some people were very happy to get a good pair of shoes.

Today all the stuff at Wal-Mart, Target, shoe stores, auto parts, etc, is produced in China or somewhere in the third world. How will the stimulus - pump priming - put Americans back to work? Yes, we can put pizza shops back in business with our stimulus dollars but our shoes and cars come from from another world. That other world can soak up a lot of liquidity.

My conclusion is that the stimulus should be used to produce things of useful value here - solar retrofits, bike routes, education, efficient refrigerators, etc.

I am forced to this conclusion because our trading partners are not reciprocating by buying American stuff. It looks like we are now the shirtless ones in a new type of colonialism. (Colonialism tended to suck all the money out of the colonies.) Thanks, NAFTA!

[mattjs85]

This has all been a textbook case of post hoc ergo propter hoc -- after it, therefore because of it.

There are glaring and I assume calculated errors i.e. "Republicans today, just like Republicans then believe the appropriate response..­.was to do nothing." I think you'll find history refutes such an assertion.

There are also noticeable contradictions i.e. the various narratives from authors about the destitution of the times and your own words about republicans not doing anything to "prevent a large percentage of its citizenry from starving" then highlighting the AAA in part III, which paid farmers to destroy crops and keep land unused. I don't understand, is starvation better under a Democrat?

Finally, you cite the fed raising the reserves as a big factor in the '37-'38 recession, however, the Banking Act of 1935 gave the Fed the authority to adjust required reserves up to 100%. As Conrad Black, FDR biographer, wrote "With this measure, Roosevelt would achieve his objective of federal control over currency and credit." Therefore, according to your own assessment, I can conclude that FDR aided the prolongation of the depression by proxy of the FDR organized, staffed, and New Deal friendly Federal Reserve.

[realpolitic]

I do not think there are any noticeable contradictions about the narratives of the destitution of the times. The times were profoundly destitute. There was a dust bowl, Hoovervilles and massive unemployment. There were food riots. There may have been contradictions in the narratives about how to respond to the destitution.

The Federal reserve may have done more to bring about the Depression during the 1920's than the FDR Federal Reserve did.

"Like the Interstate Commerce Commission before it, the Fed would be staffed with people from the industry that it was supposedly a watchdog over and who would most likely feel that what's good for banks is good for America. Throughout the years preceding the Stock Market crash, the Fed did just that. The Fed set below market interest rates and low reserve requirements that all favored the big banks. The money supply actual increased by about 60% during this time. The phrase "buying on margin" entered the American vocabulary at this time as more and more Americans over-extended themselves to take advantage of the soaring stock market."

"So what went wrong? It was in 1929 that the Fed realized that it could not sustain its current policy. When it started to raise interest rates, the whole house of cards collapsed. The Stock Market crashed and the bank panics began. ...Over the next few years, the Fed would allow the money supply to contract by a third. "

http://www.amatecon.com/gd/gdoverview.html

[mattjs85]

You don't see any contradictions in this series? Mr. Stewart paints a grim picture of starvation, malnutrition, and claims those do-nothing Republicans did nothing to help the starving people. Then, several days later he highlights in the "Recovery" part of this section the Agricultural Adjustment Act, which paid farmers to destroy crops and keep land unused. I consider his condemnation of Republicans for not doing anything to help the people and his congratulation of FDR for using tax money to pay farmers to restrict production and destroy crops at odds with each other.

As for the second part of your comment, I'm not sure what you are trying to prove. I know that the government was responsible for the great depression, you don't have to quote anything else to reaffirm it.

If you are trying to somehow exonerate FDR, you failed.

The issue is the prolongation of the great depression, not the initial causes. Mr Stewart claims that the Fed's actions of raising the required reserves was one of three main causes of the '37-'38 recession. If that is the case, then the Banking Act of 1935 (part of the new deal) is to blame as it gave the fed the authority to partake in those actions. Additionally, due to the 1935 act, FDR appointed every member of the board of governors and the Chairman was Treasury Secretary Henry Morgenthau's assistant, Marriner Eccles.

Mr. Stewart unknowingly implies that the New Deal prolonged the great depression.

[ApolloSpeaks]

DIE HARD NEW DEALERS VS. THE ORIGINAL NEW DEALERS

On the one side are the ideological die hard New Deal liberals who claim victory for the New Deal in pulling the economy out of the Great Depression. On the other side there are the New Dealers themselves who hold the opposite view and admitted that their program (like the War on Poverty) was a noble experiment that miserably failed, failed in its overarching objective of reviving the private sector and ending the unemployment crisis.

On May 9, 1939-with unemployment at 20%-an exasperated Henry Morganthau speaking for FDR and the Administration went before Congress and confessed:

"We have tried spending money. We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after seven years of this Administration we have just as much unemployment as when we started and an enormous debt to boot."

This should be taken by any resaonable person as the final, authoritative word on the New Deal as it comes from FDR's Treasury Secretary and close personal friend, the man who had all the facts and stats in hand; a good man like the President who worked his heart out for the American people and was heart broken that the great experiment had failed.

[DuganS1]

Reagan increased spending from $678b per annum to $1143b per annum, shame on him for not being able to cut spending. Govt debt went from $997b in 1981 to $2,857b in 1989 (89 was still Reagan's budget, not Bush's). GDP increased from $3,054b in 1981 to $5,400b in 1989. A lot of the growth was fueled by debt, certainly a lot to do with increased military spending, but a large portion of the increased spending was to do with mandatory spending programs like Medicare/Medicaid, and I've never heard anyone claim such spending is stimulative. In fact, I think it's a massive drag on the economy, as are a lot of medical costs. But besides all that the biggest issue.... is that private investment was very strong throughout the 1980s, which laid the groundwork for a continuing strengthening economy throughout the 1990s, even when Clinton cut spending and raised taxes.. This is in contradiction to FDRs 1930s economy, which saw weak private investment and fell like a house of cards once that spending decreased even a little bit (fiscal 1938 beginning on October 1, 1937) and he was forced to raise taxes. Reagan was pro-business while FDR was anti-business (at least until 1939-1940 when he changed), and that's the big difference.

[realpolitic]

Wow, what generalities! Regarding medicare and medicaid, why do so many business today want relief from the burden of their health care payments. They argue a health care program like Obama's would relieve them of the diifficult costs of steadily increasing health care payments. Businesses in foreign countries, like for example, Toyota and other foreign automakers do not have the burden of worker's health care payments and thus have a cost advantage when manufacturing cars. There are therefore, competitive incentives for a government sponsored health care system as well.

Secondly, Clinton and FDR may have indeed pursued different policies. The times were very different as well. I am sure Clinton would have pursued different policies during the depression than he did in the 1990's. Both presidents steadily decreased unemployment, as opposed to Bush.

[Rule Of Law]

Hale, this is a well researched and revelatory piece! Seeing the cure for that Depression laid out so clearly help us plot a map for a way out of our current crisis.

And that's good, but...

The idea behind the FED was that is would prevent just these sorts of wild economic swings--the sort that were engineered in the late 19th and early 20th centuries to provide proof that we needed a central bank. But since 1913 we have been plagued by these events anyway. It is apparent that something very big is not working!

This is a systemic flaw! Not a once in a lifetime accident. And while it's all well and good to save the patient after he has caught the disease, as history indicates we can do, I would prefer to have developed a vaccine that prevented the illness in the first place. Obviously, the FED is not the right medicine for what ails this country.

And while, once again, I appreciate the art of your insight, what I believe we Need is more of what Jeff Schweitzer addresses in his brilliant article on Wall Street as institutionalized fraud. And then we need to take the next step and begin to name names, examine the complicity between Wall Street and our government, and bring to the light of day the Class Warfare agenda of those who conspire to destroy the middle class and this country.

[Chavez08]

Absolutely!!!

[tomas0808]

Yep, and the SEC and the regulatory agencies have been bought off, like our so called leaders. And the media. I'm afraid even reforms, or restoring much of what used to be in place won't do much unless some of these corporations are broken up. If they're too big to fail they should be broken up. Period!

[DuganS1]

The capital stock in 1940 was lower than it was in 1930 by over $225b . From 1933 through 1939, net investment fell by over $100 billion ($2000), even despite a more than doubling in federal spending and the national debt.

"Most economic indicators regained the levels of the late 1920s by 1937, except for unemployment, which remained high. In Jan 1937 budget message, FDR reported "Industrial production, factory payrolls, and farm prices have steadily risen. These gains make it possible to reduce expenditures of the Federal govt." So, in 1937 FDR reduced expenditures. Also, remember in June 1936, a payment of $1.7B was made to veterans-$­1.4B had been cashed and spent by the end of 1936 leading to a upsurge in automobile production and residential housing, effectively a huge stimulus. With the termination of this artificial prop in 1937, the simultaneous reduction in Federal spending, and the introduction of social security taxes, consumer demand fell off considerably, and the economy contracted­."

In other words, the massive govt deficit spending created an artificial economic jolt (which it should have), but which was not supported by nearly the increase in private investment that it should have been (considering history). This caused the economy to rapidly deflate/collapse in late 1937 through mid-1938 back to 1934 levels. The lack of private investment was also the reason for the very high number of people unemployed or on the WPA relief rolls.

[Hale "Bonddad" Stewart - Huffpost Blogger]

Don't forget the Fed jacking up reserves. I think that provides a lot of the explanation for the 38 recession as well. Lower money supply, lower growth.

[ApolloSpeaks]

Don't forget the soaring cost of labor due to the Wagner Act and minimum wage, and the tens and millions of strike hours that hurt the recovery and discouraged private investment.

[realpolitic]

There was a deflationary spiral all through the Great Depression. Bonddad has told you several times that private investment came back strong by 1937 and you make the same arguments. You say the capital stock was lower in 1940 than in 1930. Sure, there was a deflationary spiral and the real value of the capital stock decreased.

The government made the mistake in '37 of trying to balance the budget and by raising reserve requirements. So the economy was not yet strong enough to get back on its feet. You say the recovery should have been quicker. Rather think how much slower it would have been and how much pain there would have been without FDR's programs.

The WPA was a program to respond to exceedingly high unemployment. It did not create the unemployment, but rather increased demand with people having jobs laying the ground work for additional private sector employment.