The Great Depression

Posted by PITHOCRATES - December 20th, 2011

History 101

The  Roaring Twenties were a Time of Unprecedented Innovation and Manufacturing

The Roaring Twenties were good times.  Kicked off by the Warren Harding administration.  Thanks to one of the few honest guys in his administration besides Harding.  Andrew Mellon.  Secretary of the treasury extraordinaire.  Some say the best secretary of the treasury since our first.  Alexander Hamilton.  High praise indeed.

So what did Mellon do?  He did some research that showed rich people paid less in taxes the higher the tax rates were.  The higher the rate the less they invested in plant and equipment in America.  Instead they invested their money out of the country.  In other countries’ plant and equipment.  So Mellon was a tax-cutter.  And that was his advice to Harding.  And that’s what Harding did.  And Calvin Coolidge continued.  Kept taxes low.  And kept government out of the business of business.

And how business responded.  The 1920s were a time of unprecedented innovation and manufacturing.  Low taxes, little government spending and limited government produced record employment.  Record upward mobility.  And record per capita income.  Gains in the decade touched 37%.  How?  I’ll tell you how.

The auto industry was booming thanks to Henry Ford’s moving assembly line.  Everyone was driving who wanted to drive.  The car companies sold one car for every 5 people.  This production created a boom in other industries to feed this industry.  And cars did something else.  They gave people mobility.  And opportunity.  People left the farms in droves and drove to better jobs.  Which didn’t hurt the farmers in the least as mechanization on the farm put more land under cultivation with fewer people.  Housing and cities grew.  Radio debuted.  And radio advertising.  Motion pictures went from silent to talkies.  Telephones became more common.  New electric utilities brought electricity to homes.  And new electric appliances filled those homes.  Including radios.  New electric motors filled our factories, increasing productivity and slashing consumer prices.  More people than ever before flew.  An increase of nearly 1000%.  It’s nowhere near today’s number of flyers but it was a reflection of the new industrial dominance of the United States.  There was nothing we couldn’t do.  And Europe was taking notice.  And not liking what they saw.  And talked about a European union to compete against the Americans.

Businesses scaled back Production in Anticipation of the Smoot Hawley Tariff Act

So the spectacular economic growth of the Roaring Twenties was solid growth.  It wasn’t a bubble.  It was the real deal.  Thanks to capitalism.  And a government willing to leave the free market alone.  It was so dominating that the Europeans wanted to stop it anyway they could.  One way was protective tariffs on farm imports.

American farm exports boomed during World War I.  Because most of Europe’s farmers were busy fighting.  With the end of the war the Europeans went back to their farms.  Which reduced the need for American farm imports.  And the tariffs compounded that problem.  To make things worse, prices were already falling thanks to the mechanization of the American farm.  Producing bumper crops.  Which, of course, dropped farm prices.  Good for consumers.  But bad for farmers.  Especially with the Europeans shutting off their markets to the Americans.  Because they paid for a lot of that land and mechanization with borrowed money.  And this debt was getting harder and harder to service.  Throw in some weather and insect problems in some regions and it was just too much.   Some farms failed.  Then a lot.  And then the banks that loaned money to these farms began to fail.

We created the Federal Reserve to increase the money supply to keep pace with the growing economy.  By making money cheap to borrow for those businesses trying to expand to meet demand.  They weren’t exactly doing a stellar job, though, in keeping pace with this economic expansion.  And when the bank failures hit the money supply contracted.  Thanks to fractional reserve banking.  All that money the banks created simply disappeared as the banks failed.  Starving manufactures of money to maintain growth to meet demand.  Things were getting bad around 1928.  The Fed did not intervene to save these banks.  Worried that investors were the only ones borrowing money for speculation in the stock market, they shrunk the money supply further.  About a third by 1932.  Manufacturers had no choice but to cut production.

While businesses were dealing with a shrinking money supply they had something else to worry about.  Congress was moving the Smoot-Hawley Tariff Act through congressional committees in 1929 on its way to becoming law in 1930.  This act would add a 30% tax on most imports.  Meaning that the cost factories paid for raw materials would increase by up to 30%.  Of course, sales prices have to include all costs of production.  So sales prices would have to increase.  Higher prices mean fewer sales.  Because people just can’t afford to buy as much at higher prices.  Businesses knew that once the tariff was passed into law it would reduce sales.  So they took preemptive steps.  And scaled back production for the expected fall in sales.

It was Government Meddling that Turned a Recession in the Great Depression

This brings us to the stock market crash.  The Roaring Twenties produced huge stock market gains as industry exploded in America.  Things grew at an aggressive pace.  Stock prices soared.  Because the value of these manufacturers soared.  And investors saw nothing to indicate this growth was going to stop.  Until the contraction of the money supply.  And then the Smoot-Hawley Tariff Act.  Not only would these slow the growth, they would reverse it.  Leading to the great selloff.  The Great Crash.  And the Great Depression.

As feared the Europeans responded to the Smoot-Hawley Tariff Act.  They imposed tariffs on American imports.  Making things worse for American exports.  Then President Hoover increased farm prices by law to help farmers.  Which only reduced farm sales further.  Then the banking crisis followed.  And the Fed did nothing to help the banks.  Again.  When they did start helping banks in trouble they made public which banks were receiving this help.  Which, of course, caused further bank runs as people hurried to get their money out of these troubled banks.  Tax revenue plummeted.  So Hoover passed a new sales tax to raise more revenue.  Which only made things worse.

Hoover was a Republican.  But he was a Big Government progressive.  Just like his successor.  FDR.  And all of their Big Government Keynesian solutions only prolonged the Great Depression.  It was government meddling that turned a recession into the Great Depression.  And further government meddling that prolonged the Great Depression.  Much of FDR’s New Deal programs were just extensions of the Hoover programs.  And they failed just as much as they did under Hoover.  The Great Depression only ended thanks to Adolf Hitler who plunged Europe back into war.  Providing an urgency to stop their government meddling.  And to let business do what they do best.  Business.  And they did.  Building the arsenal that defeated Hitler.

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