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The economic policies that failed us during The Great Depression and the candidates who still support them


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:

  1. Unit Banking LawsHoover 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.
  2. 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.
  3. 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???
  4. 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?
  5. 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?
  6. 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%.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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?
  12. 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.
  13. 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?

  1. 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.
  2. After World War II international trade picked up again with the Smoot-Hawley Tariffs out of the way.
  3. The Fed helped free up capital for businesses and individuals to reinvest.
  4. 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.
  5. 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

Are we headed for another Great Depression???


History has a way of repeating itself, however is now one of those times? After all, this past week was the WORST week in the 112 year history of the US stock market (yes, worse than the week of Black Thursday that some say began the Great Depression). So is the worst over, or still yet to come with a possible drop on the Dow to 4,000?

It’s important to consider the implications of a Great Depression for 2 reasons:

  1. As business-owners and Americans in general, what do we do with our money at this point?
  2. Which Presidential candidate truly understands the economics of our country (or does it even matter)? (I still haven’t decided if I will review the candidates policies yet and there affects on us…)

So let’s dive right in by looking at the similarities of our current time with the Great Depression:

  1. Stock market crash – as mentioned above we’ve had the worst stock market crash in history so this is undeniable.
  2. Global Affect – dozens of countries were affected by the Great Depression not just the US and now, just as back then, what bodes ill for the US will have wide-reaching repercussions. Did you read about the $400 billion German Bailout for instance?
  3. Huge Personal Debt – One of the primary causes for the GD was the cheap availability of money for businesses and individuals to borrow. When people couldn’t make the payments on those notes, things got ugly (to the tune of 9,000 banks closing from 1930-1933). Banks then called for people who were making payments to immediately pay off the principal in full… Those people obviously couldn’t pay off the principal in full, so the cycle of economic collapse cascaded… Don’t get me wrong, I understand that the average household is not carrying $8,000 but instead is carrying much less and most people are paying those cards off every month (about 55%). However, with the sub-prime mortgage fiasco, there are plenty of people with mortgages they can’t afford (and couldn’t afford when they took them out).
  4. Presidential candidates with no understanding of economics – If we look at Obama and McCain’s policies in detail we’ll see how they’re making the same mistakes now as Herbert Hoover and then FDR did back then.

Now let’s look at what’s different between now and then:

One reason we're not heading for another Depression

One reason we

  1. No Gold Standard – We no longer base our money and printing it on the amount of gold in the US Treasury. The requirement to base our money on Gold theoretically contributed to severe deflation that resulted in the people who managed to get some money from the banks instantly having less value then when they put the money into the bank. Studies have suggested that there was a direct relation between the quickness with which a country abandoned the gold standard and the quickness with which they recovered from the GD. Others suggest that there was no direct correlation. Believe what you will because it’s a bit more complicated than just saying the Gold Standard cause the GD which is why point 5 below is so important.
  2. No Longer an Agrarian Society – Even though, with the advent of the automobile in the 10’s and 20’s, we began our transition to an industrial society, we were still primarily a society that relied on agriculture in the late 1920’s. Not until the production required for World War II did we fully transition to an industrialized country. The huge drought that brought on the Dust Bowl was a significant contributor to the length and severity of the GD. Our current knowledge-based society really has fewer “natural disasters” that can exacerbate the stock market drop by actually devaluing the businesses and products they produce.
  3. Unions have artificially driven up wages – in the 1920’s and 1930’s unions were necessary to help increase wages to a reasonable level so that the workers could afford to purchase the products being produced. Now we have unions that have made it so expensive to produce things businesses can’t charge enough money for those products to make a profit and keep those same people employed. The auto industry is the best example of people in the 20’s not being able to afford the product they produced while the cost per hour of auto production in the US today is 30 times higher than that of China.  Sorry guys, that’s just not sustainable or competitive.
  4. No widespread panic – Sure people are pulling out of the stock market, but how many of your friends have started withdrawing their savings from the bank and stuffing their cash under their mattresses? We still fundamentally believe that cash in the bank is safe even if we are doubting that money in the stock market is.
  5. Ben Bernake is the Fed Chairman – Ok, this has less to do with one person, and more to do with the fact that we’ve had a GD to learn from and study for the last 70 years. With that knowledge we are better prepared to avoid it. Let’s face it, Mr. Bernake is the most powerful person in America and has studied the GD at length. Because of this I would argue he better understands the causes and effects than anyone did in the 20’s and 30’s. Even if he isn’t 100% correct on the causes of the GD, he still has a larger pool of knowledge to pull from then anyone did 80 years ago.

We have 4 similarities and 5 differences… So are we headed for another Great Depression???

First off we, as individuals and households, can only directly effect a few of the items above.

  1. We can affect how much personal debt we take on by learning some easy math to understand what our family can afford instead of blanketly trusting a mortgage broker who is paid on commission. Common sense appears to be as lacking back then as it is now.
  2. We can vote for the candidate who has a better chance of improving our economy based on sound economic policies – NOT because they’re a war hero or a charismatic speaker. Did I mention a lack of common sense back then and now?
  3. We can stop supporting unreasonable unions that have made the cost per hour of labor in the US auto market over $65! (the article was on the front page of the Wall Street Journal a few years ago comparing that number to the $3/hour cost in China but I can’t find it now…)
  4. We can keep our money in banks and not panic. In other words, don’t stuff cash under your mattress unless you’re a drug dealer. If you’re a drug dealer, then just keep doing what you’re doing. 🙂

One reason engineers hate economics as much as they hate poetry is because it’s all based on theories and opinions. There are no real “economic laws” like our much beloved Newton’s Laws of Motion. With that being said neither I or anyone else can predict exactly what can happen… However, every day that we get up believing we still have a job, or that we invest money in the stock market, or that we evaluate a new business for buying, building, and selling we’re attempting to predict the future, so why stop now?

That being said, over the next 12 months I plan to buy a lot of stocks! In our buy, build, and sell mentality for growing small businesses there is rarely a case where we can get better returns in the stock market (over which we have no effect) then we do with our own business. However, if we’re at the worst point in the history of the stock market, yet 1-in-10 companies have more cash stock-piled then there current market capitalization, then this is the ripest stock market for investing in history!

Let me rephrase that, nearly 10% (876 of 9,194) of the stock’s tracked by Standard and Poor’s compustat research service have more cash in the bank than the entire company is worth based on simply multiplying the stock price by the number of outstanding shares. If you ever encounter an opportunity to buy a business for $100,000 that includes $120,000 in cash in the bank and you don’t have $100,000 please let me know immediately! In essence, 10% of our stock market is in that position. As a rock-climber in West Virginia once taught me at those points of extreme jubilation, Wahootey-Hootey!

Does that mean we’ve hit bottom? Who knows? More importantly, who cares? Invest little by little over the next 12-months as the stock market continues to move and you may have the greatest investing opportunity of your life. The same could have been said for the Great Depression… Then again, I’m just a mechanical engineer who owns a few small businesses – what do I know?

To your INVESTING success, Bryan

P.S. In the next blog we’ll look at the failed economic policies that caused the Great Depression to be as long and severe as it was and which ones the candidates are still foolishly trying.