With so many people here in Southeast Volusia wondering if we are in for another great depression, it is quite appropriate to have a look at what caused the Great Depression of the 1930s so we can avoid repeating the same mistakes. I asked the “Bad Boys “ who were having lunch at Clancy’s Cantina what they thought caused the Great Depression. Most of them begged off, although Jimmy Pearsall, an accountant with Chas Belot, was quick to quip that his great depression occurred when a certain blonde dumped him. Charley Cobb, a State Farm insurance agent, said that it had a lot to do with the money supply. Doug Hodson, manager of the Pennysaver, said it must have been the fault of the Republicans.
Ironically all three of them had a point. I’m sure Jimmy was heart broken; the money supply played an important role; and Hoover pulled two colossal blunders that helped turn a run of the mill depression into the Great Depression.
First of all, the depression occurred because the government first expanded the money supply and then contracted it. This monetary expansion and contraction is the usual cause of all of our depressions.
In fact, if the government announced a policy that reversed all of the mistakes made in the Great Depression our economy would start to sprint ahead almost overnight.
If the government had done nothing after this monetary expansion and contraction, the depression would have run its course in two to four years. However, there then followed a sequence of colossal governmental economic blunders that extended an ordinary depression into the Great Depression.
Next, in 1930, the Hoover administration passed the Smoot-Hawley Tariff bill that had the effect of sharply reducing exports and imports. The whole country was hard hit as a result of this bill. The farmers were particularly hard hit as about 30 percent of their produce was exported.
In 1932, the Revenue Act was passed. This act doubled the income tax for most Americans and took the highest tax rate from 24 to 63 percent. In addition exemptions were lowered, earned income credit abolished, corporate taxes were raised and new taxes were added on gasoline and autos.
After Hoover left office, Franklin Roosevelt added his own initiatives to the economic carnage. The National Industrial Recovery Act forced much of our manufacturing economy into cartels with codes that regulated prices and terms of sale. This fascist-style arrangement ended up increasing the cost of doing business by as much as 40 percent, according to some estimates.
Still more ill-advised Roosevelt economic moves included a steady rise in existing taxes and the creation of new ones; the Wagner Act, which sent labor on a rampage of strikes and disruptions and a barrage of insults and threats against businessmen that drove investment money into hiding. The list of awesome economy destroying moves by the government is quite long.
The result was that the economy never recovered and unemployment stayed around 20 percent or more. As we all know from modern economics, the way Roosevelt could have gotten us out of the depression was to have undone the bad moves by Hoover . He should have cut the taxes, cut or eliminate the import tariffs, quit regulating the economy, kept the money supply stabilized and protected property rights. Of these, only the money was stabilized so the depression went on through World War II.
The sad fact is that nothing Roosevelt did could have possibly in any way helped the economy.
In spite of the facts our high school history textbooks tell us that the great depression occurred because of a failure of free market capitalism and Roosevelt got us out of it. Thus most of the American population has no clue what happened or what we should do to prevent it from happening again.
With a proper understanding it becomes obvious what should be done. First, we should restore the amount of money and credit down to where they belong. Next, the Bush Tax cuts should be made permanent and more cuts should be made. Then we should be looking at ways to severely reduce regulations and reduce trade barriers.
Finally we need to fix the parts of the legal system that are damaged or broken so the law again becomes a protector of property rights.
The Democratic candidates talk like they are going to take economic steps in the absolute wrong direction. The politicians could easily let the Bush tax cuts elapse and even raise rates.
This would have a severe negative effect on the economy. It is possible we could see a raising of tariffs on imports, more regulation of business, more infringement on our legal rights to own property and, heaven forbid, higher inflation.
We will probably not have anything as bad as the Great Depression, but the frustrating fact is that things could be really great if we made the right economic moves.