Roaring Twenties, Farmers, Mechanization, Smoot-Hawley Tariff, Stock Market Crash, Great Depression and Taxi Medallions

Posted by PITHOCRATES - June 12th, 2012

History 101

The New Economic Reality of Farming was that we needed Fewer Farmers in the Age of Mechanization

The Roaring Twenties was a decade of solid, real economic growth.  The world modernized during the Twenties.  Electric power, telephone, radio, motion pictures, air travel, etc.  So much of what we take for granted today became a reality during the Roaring Twenties.  But there was a downside.  Farmers borrowed money to mechanize their farms.  As farms mechanized they produced great crop yields.  Bringing bumper crops to market.  There was so much food brought to market that prices plummeted.  Reducing farm incomes so much that they couldn’t service the debt they incurred to mechanize their farms.  They defaulted.  Causing banks to fail.

By the late Twenties all the European farmers who fought in World War I were back on the farm.  And were feeding Europe again.  So not only were the Americans producing bumper crops they were losing a large export market.  Forcing farm prices down further.  There were simply more farmers than the economy was demanding thanks to the new efficiencies in farming.  But because there were so many farmers they were an important political constituency.  They were still casting a lot of votes.  So the politicians stepped in.  With a complete disregard to economic principles.  And tried to help the farmers.  With rent-seeking policies.

The farmers were hurting.  So they wanted to transfer some wealth from the masses to the farmers.  As in rent-seeking.  As opposed to profit-seeking.  Instead of creating wealth (profit-seeking) they were transferring wealth (rent-seeking).  And they did this with price supports.  They raised the price of their crops above market value.  Forcing Americans to make sacrifices in their lives so they could afford to pay higher food prices to help the farmers.  So the farmers wouldn’t have to adjust to the new economic reality of farming.  We need fewer farmers in the age of mechanization.  But it just didn’t end with higher prices.  The government would buy excess food grown by these ‘too many farmers’ and destroy it.  Or pay farmers NOT to grow food.  Then they took it up a notch.  And slapped tariffs on imported food.  Further raising the price of food.

In an Effort to raise Farming Prices the Rent-Seekers caused the Great Deflation of the Great Depression

Food tariffs were just one part of the Smoot-Hawley Tariff Act.  This act pretty much raised the tariff on everything the U.S. imported.  Greatly increasing the cost of all imports.  To protect the domestic producers from cheap foreign competition.  But there was a problem with increasing the cost of all imports.  It increased the price of whatever we built with those imports.  So much so that when they were discussing this act in Congress businesses across America knew the boom of the Twenties would end.  As did investors investing in these companies.  So even before the bill became law it caused a huge stock selloff.  Which led to the stock market crash of 1929. 

At first the higher prices helped American businesses.  Their revenue increased.  Everyone thought the tariff act was a success.  But as prices went up costs went up throughout the manufacturing pipeline.  Prices grew so high that people stopped buying.  Inventories accumulated so they cut production.  And then laid people off en masse.  Causing a great recession.  Then further rent-seeking solutions (more governmental intervention into the free market) turned that recession into the Great Depression.  What started out as a problem for overly efficient farmers turned into a national crisis.  In an effort to raise farming prices they caused the great deflation of the Great Depression.  As prices fell so did revenues.  Making it very difficult to service debt.  More people defaulted on their debt.  And more banks failed.

When the Smoot-Hawley Tariff Act became law our trading partners answered in kind.  Leading to a great trade war.  So on top of everything else what limited export markets we had shut down as well.  As the trade barriers went up economic activity decreased.  David Ricardo’s Comparative Advantage worked in reverse.  Increasing opportunity costs.  When international markets closed less efficient domestic industries took their place.  Pulling resources from more efficient uses.  Raising the cost of those resources.  Adding these cost increases on top of the tariffs.  Which further increased prices.  And further lowered economic activity.  Adding further woe onto the Great Depression.

The Medallion System dates back to the Medieval Guilds and Restricts Entry into the Cabbie Market

As the Great Depression languished on few people filled the streets of New York City (NYC).  At least few people with money who had to go places.  There were more cabs than people needed.  Supply exceeded demand.  Putting a downward pressure on taxi fares.  And increasing the time a cabbie had to work to earn some decent money.  Usually the market steps in and corrects such a situation.  Forcing some cabbies out of the cabbie business.  But not in NYC.  There they used the power of government to address this surplus of supply.  And introduced the medallion system.

This was the kind of rent seeking that dated back to those medieval guilds.  The medallion restricted entry into the cabbie market.  By limiting the number of cabs in NYC.  Every cab (at least those who can pick up passengers who hail a cab at the curb) must have a medallion permanently affixed to their cab.  Which they must purchase from the city.  Or transfer from another cab.  Currently, if you want to drive a taxi cab in NYC you better have some deep pockets.  Or have the kind of credit that lets you get a very large mortgage.  For the medallion system exists to this day.  And that medallion may cost you close to a half million dollars.

If you ever wondered why it sometimes takes so long to hail a cab in NYC this is the reason.  Rent-seeking.  As in the medallion system.  Which works just like tariffs.  Reducing supply.  And increasing prices for consumers.  So the rent-seekers can use the power of government to transfer wealth.  Instead of using innovation to create wealth.  And bringing that wealth to the market place to trade.  Instead they choose to take more wealth from the market place than they bring to it.  With the help of government.  And their rent-seeking policies.  Thus reducing overall wealth in the economy.  Which reduces economic activity.  And does nothing to help lift an economy out of recession.  Or out of a Great Depression. 

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