Monday, December 8, 2008

What's so great about the Great Depression?

As worries of a deepening recession loom before us, more and more comparisons are made between today and the Great Depression, looking for similarities and differences, examining the past like a crystal ball to the future. Bank failures and the stock market drop, though not as severe, are reminiscent of 1929. Are today’s losses going to last for decades? Are we headed for period of 20+% unemployment? What can we learn from that devastating time that will help us mitigate if not avoid the struggles and hardships suffered back then?

Fewer and fewer people are around who lived through those times, but still most of us have been touched in some way. My grandparents were born in 1902 putting them just at the beginning of their adult lives at the time of the stock market crash. Both went to college at the University of Illinois, graduating and getting married in 1926. My grandmother told stories of men (she called them hobos) who came to their back door asking for food, and then marking the house to alert others of their success or failure. My grandfather was able to enter a well established family business and though times were tight, was never without work and a house. Charity was a constant theme in his life. He lived to be 98, but has been gone for eight years now.

My father-in-law was born in 1918. The depression permeated his childhood. Orphaned while not yet through college, and unable to make the payments, he and his two brothers simply packed up and walked away from their family home. He recalls the New Deal as providing jobs when there otherwise were none. This summer we celebrated his 90th birthday, and the memories of the hard times are still sharp.

My dad, born in 1925, grew up in Chicago in a family which squeaked by. His tales include Sunday suppers consisting of popcorn and apples, as two big meals a day just wasn’t possible. His first job put him on a ship to Europe and in a tank under Patton. His memories of scarce resources morphed into lessons of frugality and self-reliance which he passed on to his five daughters. Turn out the lights. Two squares of toilet paper should be enough. His delight in a flat-tipped spoon designed to get the last little bit of peanut butter out of the jar. He’s healthy and going strong in his early 80’s, enjoying the fruits of his successful entrepreneurship, still fiscally prudent and an enthusiastic advocate of conservation.

So now to my generation. We too have been touched by the Great Depression through its imprints on our parents and grandparents. Their stories have a poignancy sharpened by our shared lives, yet blurred by the fact we are looking through someone else’s eyes. We too feel the concern and worry of experiencing such times of tenuousness and uncertainty. So we peer closely, looking for clues, for understanding, and hopefully for guidance and answers.

The Great Depression was a turning point in economic thought as well in personal philosophy. I don’t think I can capture the shift better than this summary by Mark Skousen:

The Great Depression of the 1930s was the most traumatic economic event of the twentieth century. It was especially shocking when one considers the great advances that had been achieved in Western living standards since the turn of the century. The economic abyss represented a watershed in economic history and theory; its effects on attitudes and policies still linger at this dawn of a new century.

The brunt of the depression was felt in 1929-33. In the USA, industrial output fell by over 30 per cent. Nearly half the commercial banks failed. The unemployment rate soared to 25 per cent. Stock prices lost 88 per cent of their value. Europe and the rest of the world experienced similar turmoil. In addition, the recovery in the 1930s was slow and uneven; unemployment remained high (above 15 per cent) until the armament race heated up in the early 1940s. The prolonged depression created an environment critical of laissez-faire policies and favorable towards ubiquitous state interventionism throughout the Western world. It led to the Welfare State and boundless faith in Big Government. It caused most of the Anglo-American economics profession to question classical free-market economics and to search for radical anti-capitalist alternatives, eventually converting to the 'new economics' of Keynesianism and 'demand-side' economics. Prior to the Great Depression, most Western economists accepted the classical virtues of thrift, limited government, balanced budgets, the gold standard and Say's Law. While most economists continued to defend free enterprise and free trade on a microeconomic scale, they rejected traditional views on a macroeconomic level in the postwar period, advocating consumption over saving, fiat money over the gold standard, deficit spending over a balanced budget and active state interventionism over limited government. They bought the Keynesian argument that a free market was inherently unstable and could result in high levels of unemployed labor and resources for indefinite periods. They blamed the Great Depression on laissez-faire capitalism and contended that only massive government spending during the Second World War saved the capitalist system from defeat. In short, the depression opened the door to widespread collectivism in the USA and around the world. * (emphasis mine)

So which model is right? Communism and socialism were embraced earlier this century as potential answers, but the devastating experience of the Soviet experiment has shown those paths lead to tyranny and impoverishment. We now are trying to decide once again between laissez-faire capitalism and a Keynesian-style mixed-economy. How shall we decide? What exactly are these two systems of economic theory? Where are they similar? Where do they part ways? How do we decide which is right, or at least which is best?

This is my current intellectual journey which I try to share on this blog. My basic assumption is that most people are honest and caring, wanting to find solutions which are both practical and just. Yet while we are searching, we come to such different conclusions. What exactly are the points of divergence? If we can’t convince one another, can we at least better understand how and why we differ?

So much is riding on the answers we choose. Can we keep in mind that, for the most part, we are on the same side, each doing our best to grapple with complexities that have such immediate and immense effects on our one and only life? That is my goal. I hope you will join me.

Skousen, Mark, "The Great Depression" in The Elgar Companion to Austrian Economics, ed. Peter Boettke, Edward Elgar Pub. Ltd., 1994


Burgess Laughlin said...

My father graduated from Texas A&M in 1932, the pit of the Depression. He was the first in his family to very attend a university or to become an army officer. The best job he could find was to be a night watchman in an oil refinery outside Houston. He went to law school during the day, became an attorney, and worked for the prosecutor's office.

One night he was called to a small town in the county. A man had broken into a grocery store and was on his way out the door (at night with no lights) when the store owner shot and killed him with a shotgun. My father told me he saw the body still on the ground. His clothes were tattered and the man himself was near the point of emaciation. What had he stolen? One loaf of bread.

Desperate times lead to desperate actions, even by those who are rational and act on rational values. Desperate times also, unfortunately, are a cover for irrational actions. I doubt that any agreement can be reached about what society should do economically unless there is agreement on the wider--and logically prior--issues of our source of knowledge (the Bible or feelings or reason?, how we should live (for others or for ourselves), and how we should relate to each other (peacefully or violently).

HaynesBE said...

Hi Burgess,

Thank you for the story. It gives me chills just contemplating it.

I agree with your statement:
"I doubt that any agreement can be reached about what society should do economically unless there is agreement on the wider--and logically prior--issues of our source of knowledge (the Bible or feelings or reason?, how we should live (for others or for ourselves), and how we should relate to each other (peacefully or violently)."

except I would alter it slightly to "peacefully or through force." Some very significant violations of rights are done "non-violently" while sometimes the respect for and defense of life properly requires violence. I'll be surprised if you disagree.

Michael Neibel said...

Great post: I'm unsure of the role the fed played in the GD. But what would have been a 3 yr recession tops, became a 10 plus year depression because of government interference started by Hoover and expanded by FDR. And it wasn't so much the new regulations but the fear of new ones that moved men to hang on to their money instead of investing it. Also the historians of the 19th century really didn't know in terms of principles what they were looking at. So new was the concept of individual rights that even highly educated men did not know how to interpret events in that context. Judges did not know how to adjudicate properly the concept of inalienable rights. They did not understand the difference between initiatory force and retaliatory force and because of that did not understand the need for a seperation of state and economics.

Some of the problem was just plain ignorance of capitalism and its principle of individual rights.

And some of the problem was sheer malice by those altruists who are committed to the morality of sacrifice. They believe that free trade cannot possibly be moral because it doesn't require sacrifice and therefore neither can any society based of free trade be moral either. Such people will support any idea or policy that purports to "correct" the failures of the market place with initiatory force.

FDR even admitted he knew nothing about economics. Unfortunately, he had to rely on the leading economic thinker of the time John Maynard Keynes whose demand side philosophy was and is based on false premises. FDR was not an evil man in my book, but he was an ignorant one getting all the wrong advice from the intellectuals. In this regard, there is no difference between today and then. Obama will be getting a lot of bad advice from his cabinet of witch doctors and the witch doctor wannabes in the press.

This time I think the only way were going toavoid an inflation is if they raise interest rates and get the government out of the way so business can start generating wealth to soak up the dollars.

Burgess Laughlin said...

I use "aggression" to mean specifically initiated force. perhaps I should have used that term as a contrast to "peaceful."

I use "force" and "violence" as synonyms in a social/political context. A police officer may properly use force/violence against a criminal. A sit-in is an act of force/violence against my property and therefore indirectly against me (or directly against me if the sitters are blocking a door I need to use).

I don't use either "force" or "violence" to specify "physical contact that results in bleeding, breaking, or bruising." In my usage, that would be treating the concepts of force/violence as frozen abstractions. Force/violence used by criminals would include credible threats as well.

Do you make a distinction between "force" and "violence"? How would you define each?

HaynesBE said...


Good points. I think the term "aggression" captures it best.

In my thinking, I see no difference between the threat of violence and violence itself. I understand the point you are making with force and violence. I just see force as the more fundamental concept, with fraud and aggressive violence as sub-types of initiated force.

I think my attempt to differentiate along the lines that I do comes from having gone to a Quaker college and struggled for a long time with their pacifist stance. At first I admired it while never completely comfortable with it. It was a liberating revelation to see that the violence of an act was not as important as whether or not the act was from aggression or in defense; that violence in self-defense is the pro-life action and pacific submission to an attack is in fact the anti-life action; that non-violent acts (like a sit-in or a deomonstration) can be an initiation of force in violation of individual rights and are not to be admired simply because they are non-violent.

Thanks again for reading and commenting. I am honored you find it worth your time.

Sue said...

I especially appreciate your assumption that we are all on the same side, trying to figure things out. That's refreshing.