Look beyond the Great Depression to solve the Covid-19 blues
Look beyond the Great Depression to solve the Covid-19 blues
Past economic crises do not point to a clear path forward, writes Stephen W Campbell
Unemployment levels in the United States, never seen since the 1930s, have prompted experts to examine previous eras – particularly the Great Depression – to learn lessons on how to escape the current economic crisis. Unfortunately, the past offers few simple answers. Previous economic eras, when understood in all their complexity and ambiguity, do not indicate an obvious path forward.
As a general rule, the further back in time, the more difficult historical analogies become. In 1787, when the Founding Fathers drafted the Constitution of the United States, there were only three banks in the whole country, and Spanish silver dollars could still be used to pay taxes. The poor condition of land transport made shipping goods from Philadelphia to London much more convenient, cheaper and faster than from Pittsburgh.
In the 1820s and 1930s America was rapidly becoming a more industrialized economy. It was the era of the “Bank War,” President Andrew Jackson’s famous political conflict with Nicholas Biddle, the president of the Second Bank of the United States. The second bank was the Federal Reserve of its time. Like today’s Fed, which adjusts interest rates to ensure price and employment stability, the Second Bank has served as the country’s central bank and performed important regulatory functions. He serviced the country’s public debt, managed the Treasury Department’s budget priorities, propagated a nationwide uniform currency, and curbed excessive lending among the country’s many state banks. Through its network of branches and agents abroad, the Second Bank has facilitated domestic and international trade.
But the financial tools available to the Second Bank were limited compared to what is currently available to Fed Chairman Jerome Powell. Biddle could make minor adjustments to the country’s overall money supply by selling government bonds, for example, but that measure pales in comparison to the complex and large-scale operations carried out by the Fed today. To inject money into our failed economy and lower interest rates today, the Fed is buying trillions of dollars in US Treasury bonds and other assets. It acts on a scale unimaginable for anyone living in the 1830s.
This and other remarkable differences between the political economy of the United States in the 1830s and today render any direct comparison between the two eras tenuous. The current GDP of US $ 20 trillion (626 trillion baht) is several hundred times greater than the US $ 1 billion economy of 1830, which is equivalent to around $ 50 billion in today’s currency. hui. The Treasury Department, which received about 90% of its revenue from tariffs, often ran budget surpluses. Information did not flow as easily as it does today. It took at least two weeks to deliver a newspaper from Washington, DC to St. Louis. For various reasons, there were no reliable statistics on unemployment at the national level. In total, 78% of the workforce was agricultural then, compared to less than 5% today. Slavery was fundamental not only for the political, social and economic structure of the South, but also for that of the nation.
Fortunately, today’s policymakers are not drawing inspiration from the pre-war era – a time when risky financial institutions sometimes built houses of cards that collapsed in devastating economic panics. But some leaders are trying to learn from the American response to the Great Depression. In the late 1920s, a perfect storm of events created the worst economic crisis the country has ever faced: a period of roughly 10 years of widespread bankruptcy, rural poverty, expulsions and mass migration. , urban bread lines, falling wages, crippling deflation, factories and workers’ strikes.
No factor caused the Depression, and no policy ended it. The October 1929 stock market crash wiped out the lifelong savings of millions of Americans, making them more reluctant to spend money. But even before the crash, many red flags signaled a struggling economy. Falling commodity prices made it difficult for farmers to repay loans. Major European economies struggled to pay off debts and reparations left over from WWI. High tariffs have strangled world trade. Economic inequality and the weakening middle class have dampened consumer demand.
All of these disturbing developments were passed on to the rest of the world through the international gold standard, a factor that historians and economists often point to to explain the severity and duration of the Depression. It was a system where most of the world’s major currencies were exchangeable for gold on demand, at a fixed rate. Neoclassical economists of the time believed that such a system would be automatic and self-regulating, requiring no intervention or regulation on the part of central bankers.
But the gold standard did not perform as expected. One of its many flaws was that countries did not always follow the same rules, a phenomenon resembling the imbalances that have plagued the euro area over the past decade. In 1931, the Fed made what was, in retrospect, a terrible blunder by raising interest rates. The country’s central bank was trying to curb the excessive speculation in stocks that contributed to the crash of 1929 and at the same time acquire enough gold to keep the US dollar strong. Conventional economic thought considered this to be the right decision. But while the country was already plunged into a deepening recession, raising interest rates proved costly: nearly a third of the country’s banks went bankrupt, foreign investment declined and the unemployment rate has approached 25%. Central bankers in virtually every major economy in the world have made similar mistakes. It was only when countries abandoned the gold standard that the recovery began.
The stocks that ended the Great Depression provide clues to the kinds of things central banks and regulators can do to help – but they hardly offer us easy solutions to the current crisis. We have no gold standard to give up today. New Deal agencies ushered in the modern welfare state, imposed tighter financial regulations, and recognized workers’ rights to collective bargaining, but some of them also perpetuated Jim Crow’s racism. Work assistance programs like the Works Progress Administration (WPA) employed millions of workers, but it was really government spending on the military during WWII, fueled by the growth of the military-industrial complex of the Cold War, which ushered in an unprecedented era of American prosperity. So, would the increase in America’s already huge military budget be helpful today?
The most important point here is not to avoid historical analogies or to ignore cases in which they can render fairly straightforward verdicts on questions of policy. Rather, it is to note that even expert knowledge of previous recessions can only help us a lot in the current chaos; there will always be a certain degree of uncertainty and contingency in the way things have turned out.
Although we have an extensive history of the conditions and policies that helped the United States recover from the Great Depression, we will never have the scientific certainty of conducting an experiment 100 times to see if these were the Franklin Delano Roosevelt’s inspirational speeches of confidence, or the rise in the price of gold or the creation of the WPA, which helped the most.
All we have is the unique experience of the historical record. An approach to history that leaves a lot of room for ambiguity and uncertainty allows us to appreciate the uniqueness of the past and the present, to see great changes over time, and perhaps above all, to recognize the limits of our expertise.© 2020 Zocalo Public Square