Chicken Little has added an amplifier to his sound system in recent days. There’s lots of talk that we’re sliding into a new Great Depression, because of the current financial tumult. Yes, the start of the Great Depression is eerily similar to what’s going on now. But the financial collapse in 1929 wasn’t what really caused the Great Depression en toto.
There were several factors, one of which – and perhaps the biggest hit America took – is generally overlooked.
If you look at any egghead, scholarly paper on that long, painful chapter in US history, you’ll usually see the following items cited as the cause for the Great Depression:
- the 1929 Stock Market Crash,
- bank failures,
- credit-driven consumerism in the 1920s,
- tariffs on imports and a decline in exports,
- a decline in personal savings,
- a sharp downturn in agricultural prices.
In reality, the stock market rallied in 1930, as did the bond markets. Stock prices themselves would suffer a sharp decline over the next two years, but this had very little to do with the stock market itself, or with the financial markets as you’ll see.
The biggest driver in the devastating economic downturn was the Smoot-Hawley Tariff Act – a protectionist / anti-free-trade piece of legislation that slapped tariffs on thousands of products – signed into law in the summer of 1930. In response, Europeans started buying less goods from the United States…especially agricultural products. In other words: because of government intervention in open markets, the result was the unintended consequence of harming the economy.
The second problem was that numerous Europe nations had been devastated by World War I, and were obligated to pay back loans to the United States that were near impossible for them to pay off…Germany being one example of this condition. Add to this the rise of a new form of modern-day tyranny (that would be “socialism”) in the European political theater, and what you’ve got is utter chaos in European economic circles. Germany, once a financial powerhouse, was just about wiped out; a condition that fed the rise of the Nazis to power in that nation. Russia wasn’t on the verge of collapse, it was relegated to a economic non-factor by revolution, and socialist control. France, England, and the other victors in the war were under heavy financial burden, much of which was owed to the US. Add the Smoot-Hawley Act, and what you got was a full-fledged revolt by Europe, and boycotts against US products in the only other genuine economic market in the world at that time.
This was before the days of Japan, China, Australia, and the Middle East having any sort of global economic clout. There was really only one other market out there besides the United States, and that was Europe.
So exports dried up. American farmers were producing crops that weren’t being sold. The result was a drastic drop in prices.
But the most devastating event that cemented the Great Depression into US history is the one thing rarely mentioned, because it isn’t really sexy-sounding. I’m talking here about the Dust Bowl.
The Dust Bowl started with a drought in America’s breadbasket in 1930. Because American farmers were not using modern-day crop rotation methods, the topsoil (which is needed to get crops to grow) became thin. The drought in 1930, coupled with high winds, literally stripped away what little nutrient-rich soil from the parched ground, producing huge dust storms that ravaged Texas, Oklahoma, the Great Plains, and huge portions of the country all throughout the 1930s; even up to 1938. The result for American farmers was devastating crop failures of almost Biblical proportions over the course of nearly a decade. Unable to pay their loans, taxes, and debts a huge number of farmers fell into default and foreclosure. This flooded the market with foreclosure properties and lost funds that banks couldn’t reclaim (who wants to own a farm in the middle of a desert?). The result was the collapse of both the banking industry AND the agricultural industry.
Some can compare this today with the seeming collapse of the banking industry and the housing industry, but that would not be an accurate comparison. Back during the 1920s and 1930s, the financial sector may have hired roughly the same percentage of the population (in 2007, this was something like 3.3% of all non-farm labor), but the housing industry (taken from the figures on construction jobs) only employs something like 3% of the total non-farm employees.
Contrast this with the number of people involved in agriculture in the years preceding the Great Depression, which was anywhere from 20% to 25% of the total workforce. Nowadays, that number is less than 2% (if not less than 1%) of the workforce, and they produce more agricultural products than ever previously recorded.
Hopefully now you begin to see the picture: the LARGEST employment sector in the US was almost wiped out by government intervention, over-production, and natural disasters. Take a huge chunk of the population having no money to spend, and what you get is a giant ripple effect, impacting just about everyone in the country. Add to this the fact that Europe wasn’t buying our goods, chaos in the European markets, and that the Soviet Union was putting grain out on the open market at cut-rate pricing (while starving millions of Ukrainians in the process), and you get a devastating blow to the US economy.
In short: we were carrying around a pretty big egg in one basket.
The catalyst here appears to be government-based protectionism in global markets.
Some may think my explanation “simplistic”. I’ve read more than enough economic egghead-ery that cited “overly optimistic markets”, and the Fed, and income taxes, and whatnot as bringing together a “perfect storm” that caused everything to go awry. Some of this is pulled from demi-socialist economic thought, and some of this is speculation-turned-fact.
What is clear is that none of this was relieved until after the drought-time ended (around 1938), and with the advent of WWII. All of the government interventionist policies of FDR did nothing to revive the economy. Stock prices increased after 1933, but slowly, and unemployment remained at or above 15% until 1940.
As FDR critics will tell you: it was WWII that got us out of the Great Depression. Europe, especially the Soviet Union, had no other choice but to look to the United States for manufacturing their equipment and armaments (especially the Soviets, whose flagging socialist industries were crushed by a Nazi invasion, and socialism’s own devastating effect on economic production). This literally rebuilt our infrastructure such that, after the war was over, we were the only nation that could actually revive Europe. They had no other choice but to come to us.
This then created the 1950s economic boom, and vaulted the United States of America into superpower status.
Our seeding of other markets post-WWII is, in my opinion, the safety net that will prevent this country from slipping into another huge economic depression. Between the oil wealth of the Middle East, Europe, the emerging Asian Marketplace, and prosperous English-speaking markets in Australia and Canada a strangling boycott of American goods is almost an impossibility.
The US economy is FAR more diverse than it was back in the 1920s and 1930s. As we’ve seen in the past year, even with a near collapse in the housing sector the economy still kept chugging along. That’s because things like Construction only comprise about 3% of the workforce. The US is in a position to take a couple of big hits in its economic sectors, and still stay afloat. But as I’ve shown with the intervention of the FDIC in the subprime markets, and GSEs in lending this could all change if government gets more and more control of our economy.
The passage of the present financial bail-out bill does just that: gives idiot bureaucrats more power.
We weren’t on the brink of another Great Depression. It was all propaganda designed to get average people begging the federal government to do something to “fix” the economy. And as we saw with the New Deal, the actual results will be anemic at best. If there is any resurgence in the economy in the near future, it will all be psychological.
People out there need to get a grip. They also need to stop listening to idiots like Nancy Pelosi and Barney Frank.