In her book “The Forgotten Man,” Amity Shlaes does a masterful job explaining causes of the Great Depression.
The stock market crash of 1929 is easily explained. Shlaes says what has long been known. Investors bought stocks on margin with no cash of their own invested. Rising prices only saved them up to a point. When prices began to fall, the bubble burst and stock market fortunes tumbled dramatically. But that event doesn’t account for why the country, indeed the world, fell into and stayed in the greatest economic downturn in American history.
In her mind, presidents Calvin Coolidge, Herbert Hoover and Franklin Delano Roosevelt all share blame. All three, she says, mistakenly favored tariffs as a protective measure to support American businesses against foreign competition.
We can borrow a page from physics to explain what happened next. For every action there is an equal and opposite reaction. The equal and opposite reaction in this case was other countries placing protective tariffs on their goods in response to America’s tariffs. At a time we were never more in desperate need of trading partners to loosen the flow of goods, something akin to a stifling trade war developed.
The Federal Reserve, having been formed in 1913 and still in its infancy as an institution, tightened the money supply to its member banks at the very time it should have been loosening it. Shlaes says during this time some communities even fashioned their own paper currency as local mediums of exchange.
Hoover’s idea, and later Roosevelt’s, was to force businesses to raise wages as a way of improving the economy. It didn’t work. Instead, it reduced profits, thereby keeping companies from expanding. Both Hoover and Roosevelt’s make-work jobs were only marginally successful in rejuvenating the economy and were of no impact at all after the public works projects were completed.
Hoover and Roosevelt both raised corporate taxes to the point businesses were reluctant to expand operations, which had the effect of slowing the recovery. In the Coolidge administration former Secretary of the Treasury Andrew Mellon had proven that lowering tax rates increased rather than decreased tax revenue. Doing so encouraged corporate and personal spending.
The opposite was demonstrated when taxes were raised in the 1930s. Instead of increased collections, Roosevelt’s treasury experienced a $600 million shortfall.
In 1937, despite all the government programs, the economy took another dramatic downward turn.
What is most impressive to me is how much history is repeating itself today. When he was first elected, some considered Pres. Obama something of a second FDR. It is an apt comparison. He favors raising taxes on American businesses and chastising them for locating their operations overseas as a way of not paying corporate taxes.
Business is like the rest of us. It always acts in its own best interest, which is a fundamental law of economics. Pres. Coolidge correctly said, “The business of America is business,” – a principle our current president will unfortunately never understand.
Contact Lone’ Beasley at firstname.lastname@example.org.