03 January 2013

The Great Depression from crash to false recovery and on to accelerating disaster

A brief review of the early stages of the Depression in the United States—from the Crash of 1929 to the false recovery of early 1930 to the inadequacies of President Hoover in the face of a resurgent, uncontrollable crisis—will provide the foundations for posts in coming weeks.

Everyone knows that the Great Depression started with the Black Tuesday stock market crash in New York, 1929 October 29. Yet only six months later, President Hoover gave a speech in which he said, “I am convinced we have passed the worst and with continued effort we shall rapidly recover.” Hoover was not alone in this judgment: most commentators at the time agreed that recovery was well underway in the spring of 1930. In reality, the country—and the world—was beginning what would prove to be over a decade of collapse. Ultimately the economic disaster of the Depression was overcome only through the far greater political and cultural disaster of World War II.

The stock market crash did indeed set off a sharp deterioration in economic conditions during late 1929. In addition to the credit crisis in the financial system, production dropped precipitously in the last months of the year. Auto production, for instance, collapsed from 440,000 units in August to 92,500 in December. Commodity price deflation began to accelerate and US imports declined rapidly, the first step toward the catastrophic disintegration of the global economy.

Yet during the early months of 1930, the recession seemed to be quickly receding. The stock market began to recover, employment increased, and production expanded. In late 1929, Hoover had convened the most important business leaders to coordinate a response to the crisis and announced plans to stimulate the economy through construction spending and action by the Federal Reserve. By April their efforts seemed to have been successful and a recovery appeared to be underway.

Hoover, along with his contemporaries, misunderstood the nature of the crisis. The stock market crash wasn’t merely an external shock to an otherwise healthy economy that would quickly bounce back. Rather, the crash was an expression of problems deep within the social system itself. Quite simply, the mechanism of social reproduction didn’t work anymore. That meant that all the business strategies, all the public policies, all the everyday behaviors, all the ideologies that had worked within that system were no longer viable.

Yet most people carried on as if the old way of doing things still worked. They kept fighting the same battles, plotting the same schemes, going about their lives like nothing had changed. The Democratic Party formulated no real response to the crisis, and stood slightly to the right of the Republicans on most issues. After the crisis began, Democrats focused primarily on sabotaging Hoover’s presidency and looked forward to capturing the White House in 1932, but gave no real thought to how they might do things differently. Almost no one—whether satisfied with or deeply critical of the status quo—was ready to radically rethink how their society functioned.

Even those, like Hoover, who wanted to break with the laissez-faire “no government is the best government” philosophy of his predecessors Harding and Coolidge, were only making adjustments on the margins. Hoover himself was simply not suited to the task of reimagining an entire way of life. He was thoughtful and principled, but his ideas were completely confined within the old system; he did not have the intellectual flexibility to forge ahead in a truly new direction. As historian David Kennedy has written, “Ironically, the very care with which [Hoover] had crafted his guiding principles, and the firmness of his commitment to them, would in time count among his major liabilities as a leader” (Freedom from Fear, p. 44). Nor was Hoover temperamentally suited to the political confrontations that a new approach would necessarily entail. The great commentator Walter Lippmann said, “He can face with equanimity almost any of the difficulties of statesmanship except the open conflict of wills” (cited in Freedom from Fear, p. 50). Hoover was a technocrat who wanted to use the crisis to make reforms that would improve the system. He could not understand that the system itself was the problem.

After his election in 2008, many speculated that Barack Obama might turn out to be the Franklin Roosevelt of our time. History may instead judge him our generation’s Herbert Hoover.

1 comment:

  1. Obama may well be the Hoover of our times. A new crash is almost certain, as nothing has been done to change the fundamentals of the system. Yet there are also parallels between Roosevelt's and Obama's policies.

    Roosevelt came to power in 1933 amid a run on the banks. At the time there was no FDIC: the country was in a panic and the system appeared to be collapsing. Stopping that required taking control of the monetary system by forcing everyone to give up their gold, which was purchased by the government and then revalued $20 to $35 an ounce. By taking control of the gone, Roosevelt's administration created surplus money with which to maneuover in the crisis. The Obama administration has done this in spades, via the Federal Reserve whose massive program of monetary creation (called "quantitative easing") is creating $85 billion a month right now, all funnelled to the banks.

    Of course, the difference between Roosevelt and Obama is that the former's administration took an interventionist approach, trying to regulate production and prices in addition to engaging in regional economic development (the Tennessee Valley Authority in particular). However, the National Recovery Administration was declared unconstitutional and from 1937 onward the majority of New Deal initiatives were beaten back by Southern Democrats. Alan Brinkley's main idea in a book called "The End of Reform" is that Keynesianism, or the indiscriminate pumping of money into the economy, was the default solution after attempts to deliberately reshape the economy had failed. After the war, this gave monopoly corporations free rein to carry out their own, much more limited and self-interested forms of planning.

    Roosevelt's administration created major social institutions, whereas Obama merely presides over their dismantling. Through pro-labor figures like Senator Wagner, the New Deal allied itself with workers and after a period of great radicalism that alliance ultimately made unions part of the corporate state. In the end, Roosevelt saved the industrial system and established the government-corporate partnerships that went on to make the major infrastructural investments of the postwar period. If Obama saves the financial system by pumping money into it up to the time when new infrastructural investments are possible, he will be more like Roosevelt than Hoover. And neither Americans nor the world will be the better for it.