Economics, History and the Economy

The Great Depression started with the Stock Market Crash of 1929. It worsened until 1933 when many banks failed. Franklin Roosevelt was inaugurated in 1933 and promised the American people a New Deal. By putting a lot of money into the economy there were signs of recovery but total recovery did not come until the United States became involved in World War II.

This is the conventional wisdom. In fact this would be a decent test answer. Unfortunately there are a number of gaps in it as I will point out when appropriate. But that is not the reason for this excursion. There are two questions that have been on my mind of late and I am seeking the answers. First, are we in a similar situation to the U.S. economy of 1937-1938? Second, and more profoundly: Did we ever totally recover from the Great Depression or are the props still in place?

First, a more detailed and accurate account of the events of the Great Depression. A financial bubble came to the surface in 1929. This bubble was caused primarily by the monetary policy of the Federal Reserve. Interest rates were too low which led to too much money in circulation, money that went into items of speculation such as the stock market and increased production. Now, here is an instance where I have gone against the received wisdom. I see increased production as a form of speculation. Somebody (or some committee) makes a conscious decision as to production. They estimate what will be needed in the coming months or years. That is speculation. Anyway, with this speculation the Stock Market reached unheard of heights: I call it Fantasyland. When the market broke (or began a correction if you will) money disappeared from circulation. What did the Federal Reserve do? Instead of compensating for the dwindling supply by dropping rates, they aggravated the problem by raising interest rates. Lack of money means lack of purchasing power. People (consumers) are focusing on the basics. Goods go unsold. What do we do when we have too much of something? We sell it overseas. But Congress decides to get involved by passing one of the most restrictive tariffs in history. Our trading partners respond accordingly and the problem at home only gets worse. By 1932 the situation is so bad that banks are dropping like flies. A program is created to give money to banks that are in trouble but in the interest of openness the names of the banks asking for this help will be made public which makes the program worthless. Roosevelt is elected and pushes through reforms of the banking system and programs meant to stimulate the economy. By 1936 this becomes nothing more than targeted vote-getting. When Roosevelt is re-elected comfortably, he begins to show concern for the deficit and cuts back on spending to try to balance the budget. Neither is Congress interested i n throwing more money at the problem. The result is the Great Recession of 1937-1938, from which the nation only emerges with the onset of World War II and increased government spending. This is the standard interpretation. Some say that the Depression did not end until 1947-1948 with the end of the war adjustment.

Here is where I disagree. If one posits the idea that artificial government stimuli boosted the economy but did not technically end the Depression until 1947, how can you say that it ended even then. What was happening in 1947? The Cold War with increased defense spending. The Marshall Plan and massive foreign aid for rebuilding. The GI Bill with college tuition and loan payments. In the 1950s you have the beginnings of the Interstate Highway System, a massive infrastructure project, and then in the 1960s there is an enormous increase in entitlement benefits such as Medicare/Medicaid and Social Security. If one looks at the number of people who work directly or indirectly for the government, it is a high percentage of the employment figure. The percentage of GDP related to government spending is also still high. Is that recovery?