Firstly, this is a business blog and not a political one so I don’t plan to whole-heartedly endorse either candidate… We’re at a point VERY similar to 1932 when your options are to vote for the party that brought us the Great Depression (Herbert Hoover and the Republicans) or the party that extended it for 10 years (Franklin Delano Roosevelt and the Democrats) when it could have been over in 4 (or less) years as happened in every other previous economic depression in our country.
So either way we business owners can’t be real excited about our choices. However it is important that we understand what policies can adversely affect us so that as we see them coming (from either side of the aisle) we have a plan to react immediately. If you don’t own a business, this is still supremely important because we all rely on the strength of US businesses to provide our income, goods, and services. In other words, what bodes well for business bodes well for everyone.
Before getting into specifics we need to clarify a few things. There are many theories on the causes of the Great Depression – Keyneysian, Monetarist, Austrian, Neoclasical, and Socialist (i.e. the free markets collapsed on themselve) to name a few. To those I guess we can now add the Trillian economic theory which takes parts from each. The majority of the historical information regarding the following economic policies stem from Great Myths of The Great Depression by Lawrence W. Reed.
So here are the mistakes made, in chronological order with the responsible party notated:
- Unit Banking Laws – Hoover and FDR – the laws as I understand them were in place before either was in power and neither did anything to repeal them. These laws prevented banks from expanding to new areas in order to cover short-falls in their current business plan. In other words, they couldn’t expand the services they provided to clients in order to increase profits. Canada experienced a GD at the same time that we did and yet, without unit banking laws, not a single Candian bank failed while 9,000 failed in America.
- Federal Reserve kept raising interest rates (1928-1929) Hoover – The Fed raised interest rates up to 6% in 1929 making previously available capital scarce if not non-existent. For some reason they failed to effectively regulate interest rates for the next decade. This is what Ben Bernake was talking about when alluding to Milton Freidman and Anna Schwartz’s book, A Monetary History of the United States, 1867-1960, when he said: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” This is one reason I think Ben Bernake will be instrumental in ensuring we don’t have another Depression.
- The Smoot-Hawley Tariff (1930) Hoover – One of the most protectionist pieces of legislation ever enacted in America. It essentially increased import taxes on nearly everything and as a result, not only did imports grind to a halt, so did exports. Almost overnight he destroyed the jobs of 60,000 Americans employed to make clothing from cheap imported wool that now increased in price by 140%. That’s just one example of the 1000’s of items that were affected by such policy. As a quick aside, which presidential candidate is in favor of free trade and which prefers increased regulation???
- Increased income tax from 24% to 90% for top income bracket (1932-1940) Hoover and then FDR – Hoover increased them to 63%, FDR took it from there and even signed an executive order levying a 100% income tax on all individuals making $25,000 per year or more! In case you never noticed, a poor man never signed your paycheck. When my businesses make money I don’t want to pay corporate tax on it so I reinvest it in my business. I hire new people, I start new divisions, I invest in marketing or new products. Guess what? That’s what the majority of business owners and wealthy individuals do. We don’t bury it in our mattresses. You increase income tax for the wealthy and you slow the economy. Which candidate wants to increase taxes to people making more than $250k per year? With that in mind, why do we need new taxes? When do we start cutting government spending?
- Ridiculous government spending (1928-1941) Hoover and FDR – Hoover increased the government’s percentage of GNP from 16.4% to 21.5% from 1930-1931! FDR proposed a $10 billion dollar budget with $3.5 billion in revenue. From 1933-1936 government spending increased 83% while the debt increased 73% under the guidance of FDR. If a goverment spends money that it doesn’t have how in the world will the people ever be able to afford the taxes to cover that? Are either of the current candidates advocating MASSIVE reduction in government spending (like the 25% reduction in government that FDR lied about during his campaign). Has either candidate declared any specific reduction in government?
- Seized gold holdings and artificially set the price (1933) FDR – This is one reason why you can’t blanketly say that the gold standard by itself contributed to the GD. Some historians believe that this sole act devalued the American dollar by 40%.
- Declared Banking Holiday (1933) FDR – In theory this kinda made sense. Close all the banks so people can’t get withdraw all of their money and they will calm down in the meantime. The only problem was 5,000 banks didn’t reopen immediately after the holiday and 2,000 NEVER reopened at all. Thanks FDR.
- National Recovery Administration (1933) FDR – or NRA was estimated to increase the cost of doing business by an average of 40% – 5 months before the NRA was enacted, factory employment was up 23% and payrolls were up 35% – within 6 months after the NRA industrial production dropped 25%. Thanks again, FDR. Luckily the Supreme Court ruled this as unconstitutional though it was later replaced by the Wagner Act.
- Civil Works Administration (1933) FDR – Later to be replaced by the Works Progress Administration and the foundation for our modern welfare system. These are the programs that paid workers to catalog 350 different ways to cook spinach and managed to hire 6000 actors (for what reason no one seems to know). It was true back then and it’s certainly true now, taking taxpayer money to pay people to do nothing does not improve the economy. The creative entrepreneurs at Google, Apple, Microsoft, and small businesses around the country will always put better use to that money.
- Agricultural Adjustment Act (1933) FDR – In a country where 25% of the public is unemployed why would the President promote a law that resulted in the slaughter of 6 million piglets, the destruction of crops, and payments to farmers for not working? That’s not a rhetorical question – I honestly don’t know the answer. Thank goodness the Supreme Court ruled it as unconstitutional in 1936.
- Social Security (1935) FDR – We’re still paying dearly for this program. Is there anyone in America who thinks this is a sustainable program and should be your main source of income in retirement? Which candidate is promoting Social Security reform and which is promoting Social Security tweaks?
- The Wagner Act (1935) FDR – Also known as the National Labor Relations Act. In theory it was a decent idea to help workers negotiate a fair wage and reasonable hours. However, coupled with the poor economy and higher corporate taxes (another FDR program), businesses couldn’t afford continually increased wages and the act provided excessive power to the union leaders without necessarily benefiting the rank and file members. Depending on which history books you read, it had its benefits but it also promoted violence by newly empowered militant unions that still continue at times today.
- Minimum Wage (1938) FDR – I imagine this one will receive the highest amount of disagreement as a failed policy. However when you can’t hire inexperienced, young, unskilled labor for simple tasks, jobs are lost. In 1933 a similar act was passed that resulted in 500,000 blacks losing their jobs according to p.336 of ECONOMICS AND THE PUBLIC WELFARE.
So if these are some (maybe most) of the failed policies that lead to the Great Depression and its severity, what policies took us out of it?
- During World War II warring countries in need of supplies looked to the US to provide them once again opening up international trade that Smoot-Hawley Tariffs destroyed.
- After World War II international trade picked up again with the Smoot-Hawley Tariffs out of the way.
- The Fed helped free up capital for businesses and individuals to reinvest.
- FDR left office so businessmen were no longer afraid to reinvest in their own businesses for fear that their own commander-in-chief thought of them as “stupid” and “economic royalists”. Lammot Du Pont probably expressed the sentiment of most business builders (i.e. job creators) in 1937: “Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? . . . Are we to have inflation or deflation, more government spending or less? . . . Are new restrictions to be placed on capital, new limits on profits? . . . It is impossible to even guess at the answers.” Obviously he was talking about all the uncertainty that the New Deal policies brought about.
- 3.7% of the World’s Population died during WW2. I don’t have any information on the exact number of unemployed people worldwide prior to World War 2 but with nearly 73 million less mouths to feed afterward that can reduce the unemployment considerably.
To finally wrap this up, my last blog referenced some of our similarities and differences between the current economy and that of the Great Depression and obviously I’m very optimistic that we’re not anywhere close to a Depression. However, with the stroke of a pen, several Presidents have proved that poor economic insight and a fundamental lack of business knowledge could quickly deteriorate any economy.
As for why FDR kept getting reelected – never underestimate the power of charisma. That’s the number one trait of cult leaders and though charisma in and of itself is certainly not bad (I consider myself to be rather charismatic), charisma used to promote a “Raw Deal” can be devastating.
You can do your own research to determine which policies of which candidates are going to take us further down the rabbit hole of our economy (as a Republican and Democrat have both done) and which policies will help get us out of this mess quickly.
To your success, Bryan