Monday, August 15, 2011

The Fed Was Wrong In The 1930s and It Is Wrong Now!

The Fed Was Wrong In The 1930s and It Is Wrong Now!

If we don’t demand sane fiscal management and Corporate Regulation NOW we are headed for a collapse that can no longer be labeled a “Recession”; It will be an unmistakable Depression resolved only by the ignition of the pile worldwide tinder awaiting combustion into
 World War III.

The total amount of money U.S. companies have trapped overseas is $1.2 trillion. Chambers is advocating for a one-time tax break to allow them to bring that money home at a rate of, say five percent. That would, he says, stimulate the economy and create jobs.

Federal Tax Brackets

Your tax bracket is the rate you pay on the "last dollar" you earn; but as a percentage of your income, your tax rate is generally less than that. First, here are the tax rates and the income ranges where they apply:
Tax Year:
Filing Status:
If your taxable income is between...
your tax bracket is:
To take an example, suppose your taxable income (after deductions and exemptions) was exactly $100,000 in 2008 and your status was Married filing separately; then your tax would be calculated like this:
$ 8,025 minus
0 )
x .10 :
$ 802.50
32,550 minus
8,025 )
x .15 :
65,725 minus
32,550 )
x .25 :
100,000 minus
65,725 )
x .28 :
$ 22,372.00
This puts you in the 28% tax bracket, since that's the highest rate applied to any of your income; but as a percentage of the whole $100,000, your tax is about 22.37%.                                                            

          From Bernie Sanders:


The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression.

An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study.

"As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders.

"This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."

Among the investigation's key findings is that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland, according to the GAO report. "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president," Sanders said.

The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse.  In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

For example, the CEO of JP Morgan Chase served on the New York Fed's board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed.  Moreover, JP Morgan Chase served as one of the clearing banks for the Fed's emergency lending programs.

In another disturbing finding, the GAO said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds.  One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it might have created the appearance of a conflict of interest.

To Sanders, the conclusion is simple. "No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed's board of directors or be employed by the Fed," he said.

The investigation also revealed that the Fed outsourced most of its emergency lending programs to private contractors, many of which also were recipients of extremely low-interest and then-secret loans.

The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo. 

The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts.

Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG.

A more detailed GAO investigation into potential conflicts of interest at the Fed is due on Oct. 18, but Sanders said one thing already is abundantly clear. "The Federal Reserve must be reformed to serve the needs of working families, not just CEOs on Wall Street."

To read the GAO report, click here.

Our government is in knots over ways to lower the federal budget deficit. Well, what if we told you we found a pot of money - over $60 billion a year - that could be used to help out?
That bundle is tax money not coming in to the IRS from American corporations. One major way they avoid paying the tax man is by parking their profits overseas.

They'll tell you they're forced to do that because the corporate 35 percent tax rate is high in relation to other countries, and indeed it seems the tax code actually encourages companies to move businesses out of the country.

"60 Minutes" correspondent Lesley Stahl talks tax havens and the new ways American companies are stashing their profits abroad.

Companies searching out tax havens is nothing new. In the 80s and 90s, there was an exodus to Bermuda and the Cayman Islands, where there are no taxes at all.
When President Obama threatened to clamp down on tax dodging, many companies decided to leave the Caribbean, but as we first told you in March, instead of coming back home, they went to safer havens like Switzerland.
Several of these companies came to a small, quaint medieval town in Switzerland called Zug.
Hans Marti, who heads Zug's economic development office, showed off the nearby snow-covered mountains. But Zug's main selling point isn't a view of the Alps: he told Lesley Stahl the taxes are somewhere between 15 and 16 percent.
"And in the United States it's 35 percent," Stahl pointed out.
"I know. It's half price," Marti said.
Marti told Stahl that Zug most probably has the lowest tax rates in Switzerland.
"So you're kind of a tax haven within a tax haven?" she remarked.
"Maybe, yes," he acknowledged.
The population of the town of Zug is 26,000; the number of companies in the area is 30,000 and growing at an average rate of 800 a year. But many are no more than mailboxes.
Texas Democratic Congressman Lloyd Doggett questions whether the recent moves of several companies are legit. "A good example is one of my Texas companies that's been in the news lately, Transocean," Rep. Doggett told Stahl.
Transocean owned the drilling rig involved in the giant BP oil spill. They moved to Zug two years ago.

"I'm not sure they even moved that much. They have about 1,300 employees still in the Houston area. They have 12 or 13 in Switzerland," Doggett told Stahl.
"And yet they claim that they're headquartered over there," Stahl remarked.
"They claim they're Swiss. And they claim they're Swiss for tax purposes. And by doing that, by renouncing their American citizenship, they've saved about $2 billion in taxes," Doggett explained.
Stahl and "60 Minutes" decided to visit their operations in Zug.
A woman at the door told Stahl, "At the moment my boss is not here."
She said her boss wasn't there and we should call someone halfway around the world, in Houston.
"But this is the headquarters," Stahl remarked.
"I know," the woman said.
When asked if the CEO was there or is normally at the Zug office, the woman said "No."
Produced by Shachar Bar-On
CBS News)  Another Texas company that moved to Zug is Weatherford, a $10 billion oil field services firm. It still has 2,800 workers in Houston. But according to official documents, they are incorporated in Zug, in a small building. But there was no Weatherford on the sign outside.

"Finally found it," Stahl said, searching over a row of mail boxes in the foyer of the building. "Listed in this thing: Weatherford International, here's the mailbox. But we don't know even where to go, because there's no listing for the international headquarters of Weatherford."
So Stahl started knocking on doors.
"We're looking for Weatherford. Are they in this building?" Stahl asked one woman working in an accounting office.
"Yes," she replied. "Just a moment let me check."
Stahl was shown to a conference room they said Weatherford rents for board meetings, but Weatherford's Houston office told us they never go there. So are these big companies pulling a fast one? Apparently not: under both Zug and U.S. tax laws, it's perfectly legal to get the low tax rate even without a real presence in Zug. But Rep. Doggett wants to change that.
"You have a proposed legislation that a company will be taxed not based on where they file some pieces of paper, but where their decision makers and management actually resides and makes decisions," Stahl remarked.
"Let them pay the same way that other Houston-based companies pay. And so if they have their management and control are there, they ought to be paying here in the United States. I think it's fair," Doggett argued.
We found that faced with the mere threat of Doggett's legislation, Transocean and Weatherford both recently packed up their top brass and shipped them to Geneva.
We were told Transocean's top ten executives live in the Geneva area, and work on the top two floors of a Geneva office building - everyone from the CEO to the chief financial officer, to the vice president of taxes.
They wouldn't talk to us on camera, and neither would Weatherford. They also moved their CEO and CFO to Geneva. And so now we're beginning to see a jobs exodus from the U.S. of top management.
"We can't write a law their lawyers can't get around. That's the whole problem here," Doggett explained.
"You're in Congress. Why did Congress write these laws that allowed this to happen?" Stahl asked.
"There's been a lot of arm twisting, a lot of effective lobbying here, and some really smart tax lawyers figuring out how to game the system with one shenanigan after the other," the congressman replied.
"But are they shenanigans or is it the law?" Stahl asked.
"I think it was a shenanigan when some of these companies felt so strongly about America that they renounced their American citizenship and began saluting a foreign flag. They exploited a provision in our tax laws and moved offshore," Doggett said.
Congress tried to put a stop to that with a law passed in 2004, mandating that any company that wanted to move offshore would still have to pay the 35 percent. But because of loopholes in the tax code, companies can substantially lower their taxes by moving chunks of their businesses to their foreign subsidiaries.
CBS News)  "I think when people hear that all these companies are moving overseas because of taxes, they think that doesn't smell right," Stahl said to Swiss tax attorney Thierry Boitelle.

"Yeah, the question is, 'Does a company have a moral obligation to pay its fair share?'" he replied.
"I think many companies in the U.S. would like to keep the jobs in the U.S. if they could, but they also need to keep their shareholders happy. And they are in the U.S. in a corporate tax nightmare because it's the highest tax rate in the world," Boitelle explained.
The U.S. actually has the second highest rate in the developed world after Japan, and they've considered lowering theirs.

"We are dealing with a tax system that is a dinosaur," Cisco CEO John Chambers told Stahl.
One CEO who would talk to us was Chambers. Cisco is the giant high tech company headquartered in San Jose, Calif. He says our tax rate is insane.
It's forcing companies into these maneuvers, especially when many other industrialized countries including Canada are busy lowering their tax rates in order to lure our companies and our jobs away.
"Every other government in the world has realized that the U.S. has it wrong. They're saying, 'I'm going to have lower taxes, period.' That's what you see all across Western Europe, that's what you see in Asia in the developed countries," Chambers said.
When asked if he's judged as a CEO on issues like taxes, Chambers said, "Absolutely."
He's been expanding Cisco overseas because of growing demand abroad, but also to lower the company's taxes: their average rate over the last three years was just 20 percent.
Economist Martin Sullivan says it's standard operating procedure for companies like Cisco. "U.S. multinationals are shifting their research facilities, shifting their manufacturing facilities, and shifting some regional headquarters into Switzerland and into Ireland. And those are massive numbers of jobs," he told Stahl.
Sullivan says Ireland taxes corporations at just a third of the U.S. rate, so no wonder the outskirts of Dublin look like Silicon Valley. Many well-known companies are all but obliged to go abroad.
"Well, if you have a 35 percent rate in the United States and, for example, a 12.5 percent rate in Ireland, there's a incentive to move your factory to Ireland," he explained.
"Six hundred American companies are in Ireland and they employ 100,000 people," Stahl pointed out. "Those are jobs that aren't here. And they moved to Ireland because of taxes."
"The U.S. Treasury in effect is subsidizing investment in Ireland," Sullivan said.
"Why isn't everybody in Ireland if it's that great?" Stahl asked.
"Almost everybody is in Ireland," Sullivan said. "All the pharmaceutical companies, all the high tech companies. You're stupid if you're not in Ireland," he replied.
"We notice that you have an awful lotta companies in Ireland," Stahl told Cisco's John Chambers.
"Yes we do," he acknowledged.
By Stahl's count, Cisco has eight companies in Ireland.
"We do what makes sense to the shareholders," Chambers said. "We go where there are incentives in countries that say, 'We want you here, we're going to give you tax advantages, and we want you to add jobs here, etc.' We can no longer in America say, 'This is how we do it, therefore you must do it.' We've gotta change, or we're going to be left behind."
CBS News)  An increasingly popular way, particularly pharmaceutical and hi-tech companies like Google avoid paying the 35 percent is to shift their patents, computer code, pill formulas, even logos from their U.S. bases to their outposts in low-tax countries.

"A hundred years ago, if a company would want to relocate, you know, you'd have to pick up a factory, machinery and move everything. Today, a company can move predominantly all of its assets just on paper," Swiss tax attorney Thierry Boitelle explained.
"Or Coca-Cola could take the recipe out of the vault, put it in a Swiss vault," he said.
"And then it's Swiss?" Stahl asked.
"Yeah," he replied.
When a formula or a computer code is registered abroad - say in Zug - a U.S. company is allowed to claim a lot of its taxable profits are there, even if most of its sales are in the U.S.
Economist Martin Sullivan told Congress these patent and profit transfers are accounting tricks that have allowed companies to chip away at the 35 percent and save tens of billions of dollars. He says that from 2007 to 2009 these maneuvers helped lower Pfizer's average tax rate to 17 percent; Merck to 12.5 percent, and GE to just 3.6 percent.
"It's really remarkable, as I review the data, is the consistency with which you see this phenomenon. The taxes are going down, the profits are shifting offshore at an accelerated rate over the last few years," Sullivan said.
So now these companies have profits accumulating overseas in places like Zug.
If they bring the money home, it's taxed the full 35 percent. If they leave it overseas, the IRS can't touch it. In other words, the tax law all but forces companies to keep their money out of the country, indefinitely.
"We leave the money over there. I create jobs overseas; I acquire companies overseas; I build plants overseas; and I badly want to bring that money back," John Chambers told Stahl.
Chambers told Stahl Cisco has almost $40 billion overseas that could be brought back to the U.S.
The total amount of money U.S. companies have trapped overseas is $1.2 trillion. Chambers is advocating for a one-time tax break to allow them to bring that money home at a rate of, say five percent. That would, he says, stimulate the economy and create jobs.
"What is your downside for money that isn't going to come back anyhow? I'd say your downside is zero," he told Stahl.
But the Obama administration has opposed this idea in the past. When it was tried in 2005, the Treasury did rake in billions of dollars, though very few jobs were created.
"What if tomorrow Congress passed a quickie law and the tax rate was 20 percent? Would that solve everything?" Stahl asked.
"I think it is the most important ingredient that we have to think about being competitive," Chambers replied.
"You lower the rate from 35 percent to 20 percent. You lose something like $2 trillion in taxes. We have a horrible deficit crisis, debt crisis. That's almost too much money to lose. What's your answer to that?" Stahl asked.
"My answer's very simple: every other developed country in the world has already done this. I'm not asking to give me a favor, or a hand out," Chambers replied.
"You know what: it sounds it," Stahl remarked.
Chambers replied, "All we're asking is: Give us a level playing field. Get us close."

The Great Depression Is The Greatest Case Of Self-Inflicted Economic Catastrophe In The Twentieth Century. “

Imagine what it would be like to have a family full of brothers and sisters.  Babies wrapped in blankets, no clothes underneath, their families couldn't afford them.  Imagine all your other siblings in ragged hand-me-downs, and old scraps you found on the street. 

You're all so depressed, because Dad lost his job.  You have to wait in line, all of you, every morning, really early, babies are still asleep, all for a microscopic crumb or crust of bread. 

This was the 1930's: The Great Depression was bearing down on all; the Hindenburg air ship burned;  Charles Lindbergh's baby was kidnapped and later found dead. Follow us as we sail through the headlines of the New York Times and the articles.  Imagine, just imagine.  
Daily life in the thirties was hard and stressful. What if you came home and your wife yelled at you because you had no job or your husband threw a fit because there was no bread? This was how most people were in the thirties, miserable.

The lines for bread were long and they lasted long too. The jobs were very hard to get especially in 1933. Imagine if you had to live in the thirties. 

Historical Importance of the Great Depression:
The Great Depression, an immense tragedy that placed millions of Americans out of work, was the beginning of government involvement in the economy and in society as a whole.

After nearly a decade of optimism and prosperity, the United States was thrown into despair on Black Tuesday, October 29, 1929, the day the stock market crashed and the official beginning of the Great Depression. As stock prices plummeted with no hope of recovery, panic struck. Masses and masses of people tried to sell their stock, but no one was buying. The stock market, which had appeared to be the surest way to become rich, quickly became the path to bankruptcy.

And yet, the Stock Market Crash was just the beginning. Since many banks had also invested large portions of their clients' savings in the stock market, these banks were forced to close when the stock market crashed. Seeing a few banks close caused another panic across the country. Afraid they would lose their own savings, people rushed to banks that were still open to withdraw their money. 

This massive withdrawal of cash caused additional banks to close. Since there was no way for a bank's clients to recover any of their savings once the bank had closed, those who didn't reach the bank in time also became bankrupt.
Businesses and industry were also affected. Having lost much of their own capital in either the Stock Market Crash or the bank closures, many businesses started cutting back their workers' hours or wages. In turn, consumers began to curb their spending, refraining from purchasing such things as luxury goods. This lack of consumer spending caused additional businesses to cut back wages or, more drastically, to lay off some of their workers. Some businesses couldn't stay open even with these cuts and soon closed their doors, leaving all their workers unemployed.
The Dust Bowl
In previous depressions, farmers were usually safe from the severe effects of a depression because they could at least feed themselves. Unfortunately, during the Great Depression, the Great Plains were hit hard with both a drought and horrendous dust storms.
Years and years of overgrazing combined with the effects of a drought caused the grass to disappear. With just topsoil exposed, high winds picked up the loose dirt and whirled it for miles. The dust storms destroyed everything in their paths, leaving farmers without their crops.
Small farmers were hit especially hard. Even before the dust storms hit, the invention of the tractor drastically cut the need for manpower on farms. These small farmers were usually already in debt, borrowing money for seed and paying it back when their crops came in. When the dust storms damaged the crops, not only could the small farmer not feed himself and his family, he could not pay back his debt. Banks would then foreclose on the small farms and the farmer's family would be both homeless and unemployed.
Riding the Rails
During the Great Depression, millions of people were out of work across the United States. Unable to find another job locally, many unemployed people hit the road, traveling from place to place, hoping to find some work. A few of these people had cars, but most hitchhiked or "road the rails."
A large portion of the people who road the rails were teenagers, but there were also older men, women, and entire families who traveled in this manner. They would board freight trains and crisscross the country, hoping to find a job in one of the towns along the way.
When there was a job opening, there were often literally a thousand people applying for the same job. Those who weren't lucky enough to get the job would perhaps stay in a shantytown (known as "Hoovervilles") outside of town. 

Housing in the shantytown was built out of any material that could be found freely, like driftwood, cardboard, or even newspapers.
The farmers who had lost their homes and land usually headed west to California, where they heard rumors of agricultural jobs. Unfortunately, although there was some seasonal work, the conditions for these families were transient and hostile. Since many of these farmers came from Oklahoma and Arkansas, they were called the derogatory names of "Okies" and "Arkies." (The stories of these migrants to California were immortalized in the fictional book, The Grapes of Wrath by John Steinbeck.)
Roosevelt and the New Deal
The U.S. economy broke down and entered the Great Depression during the presidency of Herbert Hoover. Although President Hoover repeatedly spoke of optimism, the people blamed him for the Great Depression. Just as the shantytowns were named Hoovervilles after him, newspapers became known as "Hoover blankets," pockets of pants turned inside out (to show they were empty) were called "Hoover flags," and broken-down cars pulled by horses were known as "Hoover wagons."
During the 1932 presidential election, Hoover did not stand a chance at reelection and Franklin D. Roosevelt won in a landslide. People of the United States had high hopes that President Roosevelt would be able to solve all their woes. As soon as Roosevelt took office, he closed all the banks and only let them reopen once they were stabilized. Next, Roosevelt began to establish programs that became known as the New Deal.
These New Deal programs were most commonly known by their initials, which reminded some people of alphabet soup. Some of these programs were aimed at helping farmers, like the AAA (Agricultural Adjustment Administration). While other programs, such as the CCC (Civilian Conservation Corps) and the WPA (Works Progress Administration), attempted to help curb unemployment by hiring people for various projects.
The End of the Great Depression
To many at the time, President Roosevelt was a hero. They believed that he cared deeply for the common man and that he was doing his best to end the Great Depression. Looking back, however, it is uncertain as to how much Roosevelt's New Deal programs helped to end the Great Depression. By all accounts, the New Deal programs eased the hardships of the Great Depression; however, the U.S. economy was still extremely bad by the end of the 1930s.

The major turn-around for the U.S. economy occurred after the bombing of Pearl Harbor and the entrance of the United States into World War II.
Once the U.S. was involved in the war, both people and industry became essential to the war effort. Weapons, artillery, ships, and airplanes were needed quickly. Men were trained to become soldiers and the women were kept on the homefront to keep the factories going. Food needed to be grown for both the homefront and to send overseas.


It is straightforward to narrate the slide of the world into the Great Depression. The 1920's saw a stock market boom in the U.S. as the result of general optimism: businessmen and economists believed that the newly-born Federal Reserve would stabilize the economy, and that the pace of technological progress guaranteed rapidly rising living standards and expanding markets.

The U.S. Federal Reserve's attempts in 1928 and 1929 to raise interest rates to discourage stock speculation brought on an initial recession.

Caught by surprise, firms cut back their own plans for further purchase of producer durable goods; firms making producer durables cut back production; out-of-work consumers and those who feared they might soon be out of work cut back purchases of consumer durables, and firms making consumer durables faced falling demand as well.

Falls in prices--deflation--during the Depression set in motion contractions in production which riggered additional falls in prices. With prices falling at ten percent per year, investors could calculate that they would earn less profit investing now than delaying investment until next year when their dollars would stretch ten percent further. Banking panics and the collapse of the world monetary system cast doubt on everyone's credit, and reinforced the belief that now was a time to watch and wait. The slide into the Depression, with increasing unemployment, falling production, and falling prices, continued throughout Herbert Hoover's Presidential term.

There is no fully satisfactory explanation of why the Depression happened when it did. If such depressions were always a possibility in an unregulated capitalist economy, why weren't there two, three, many Great Depressions in the years before World War II? Milton Friedman and Anna Schwartz argued that the Depression was the consequence of an incredible sequence of blunders in monetary policy. But those controlling policy during the early 1930s thought they were following the same gold-standard rules of conduct as their predecessors. 

Were they wrong? If they were wrong, why did they think they were following in the footsteps of their predecessors? If they were not wrong, why was the Great Depression the only Great Depression?

At its nadir, the Depression was collective insanity. Workers were idle because firms would not hire them to work their machines; firms would not hire workers to work machines because they saw no market for goods; and there was no market for goods because workers had no incomes to spend. Orwell's account of the Depression in Britain, The Road to Wigan Pier, speaks of "...several hundred men risk[ing] their lives and several hundred women scrabbl[ing] in the mud for hours... searching eagerly for tiny chips of coal" in slagheaps so they could heat their homes. For them, this arduously-gained "free" coal was "more important almost than food." All around them the machinery they had previously used to mine in five minutes more than they could gather in a day stood idle.

The Great Crash

The U.S. stock market boomed in the 1920s. Prices reached levels, measured as a multiple of corporate dividends or corporate earnings, that made no sense in terms of traditional patterns and rules of thumb for valuation.

A range of evidence suggests that at the market peak in September 1929 something like forty percent of stock market values were pure air: prices above fundamental values for no reason other than that a wide cross-section of investors thought that the stock market would go up because it had gone up.

By 1928 and 1929 the Federal Reserve was worried about the high level of the stock market. It feared that the "bubble" component of stock prices might burst suddenly. When it did burst, pieces of the financial system might be suddenly revealed to be insolvent, the network of financial intermediation might well be damaged, investment might fall, and recession might result.

It seemed better to the Federal Reserve in 1928 and 1929 to try to "cool off" the market by making borrowing money for stock speculation difficult and costly by raising interest rates. They accepted the risk that the increase in interest rates might bring on the recession that they hoped could be avoided if the market could be "cooled off": all policy options seemed to have possible unfavorable consequences.

In later years some, Friedrich Hayek for one, were to claim that the Federal Reserve had created the stock market boom, the subsequent crash, and the Great Depression through "easy money"policies.

pp. 161-2: "[U]p to 1927 I should have expected that the subsequent depression would be very mild. But in that year an entirely unprecedented action was taken by the American monetary authorities [who] succeeded, by means of an easy-money policy, inaugurated as soon as the symptoms of an impending reaction were noticed, in prolonging the boom for two years beyond what would otherwise have been its natural end. And when the crisis finally occurred, deliberate attempts were made to prevent, by all conceivable means, the normal process of liquidation."

Those making such claims for over-easy policy appear to have spent no time looking at the evidence. Weight of opinion and evidence on the other side: the Federal Reserve's fear of excessive speculation led it into a far too deflationary policy in the late 1920s: "destroying the village in order to save it."

The U.S. economy was already past the peak of the business cycle when the stock market crashed in October of 1929. So it looks as though the Federal Reserve did "overdo it"--did raise interest rates too much, and bring on the recession that they had hoped to avoid.

The stock market did crash in October of 1929; "Black Tuesday", October 29, 1929, saw American common stocks lose something like a tenth of their value. That it was ripe for a bursting of the bubble is well known; the exact reasons why the bubble burst then are unknowable; more important are the consequences of the bursting of the bubble.

The stock market crash of 1929 greatly added to economic uncertainty: no one at the time knew what its consequences were going to be. The natural thing to do when something that you do not understand has happened is to pause and wait until the situation becomes clearer. Thus firms cut back their own plans for further purchase of producer durable goods. Consumers cut back purchases of consumer durables. The increase in uncertainty caused by the stock market crash amplified the magnitude of the initial recession.

Even a Panic Is Not Altogether a Bad Thing:

The first instinct of governments and central banks faced with this gathering Depression began was to do nothing. Businessmen, economists, and politicians (memorably Secretary of the Treasury Mellon) expected the recession of 1929-1930 to be self-limiting. Earlier recessions had come to an end when the gap between actual and trend production was as large as in 1930. They expected workers with idle hands and capitalists with idle machines to try to undersell their still at-work peers.

Prices would fall.
When prices fell enough, entrepreneurs would gamble that even with slack demand production would be profitable at the new, lower wages.

Production would then resume.

Throughout the decline--which carried production per worker down to a level 40 percent below that which it had attained in 1929, and which saw the unemployment rise to take in more than a quarter of the labor force--the government did not try to prop up aggregate demand.

The Federal Reserve did not use open market operations to keep the money supply from falling.

Instead the only significant systematic use of open market operations was in the other direction: to raise interest rates and discourage gold outflows after the United Kingdom abandoned the gold standard in the fall of 1931.

The Federal Reserve thought it knew what it was doing: it was letting the private sector handle the Depression in its own fashion.

It saw the private sector's task as the "liquidation" of the American economy.
And it feared that expansionary monetary policy would impede the necessary private-sector process of readjustment.

Those making such claims for over-easy policy appear to have spent no time looking at the evidence. Weight of opinion and evidence on the other side: the Federal Reserve's fear of excessive speculation led it into a far too deflationary policy in the late 1920s: "destroying the village in order to save it."

The U.S. economy was already past the peak of the business cycle when the stock market crashed in October of 1929. So it looks as though the Federal Reserve did "overdo it"--did raise interest rates too much, and bring on the recession that they had hoped to avoid.

The stock market did crash in October of 1929; "Black Tuesday", October 29, 1929, saw American common stocks lose something like a tenth of their value. That it was ripe for a bursting of the bubble is well known; the exact reasons why the bubble burst then are unknowable; more important are the consequences of the bursting of the bubble.

The stock market crash of 1929 greatly added to economic uncertainty: no one at the time knew what its consequences were going to be. The natural thing to do when something that you do not understand has happened is to pause and wait until the situation becomes clearer. Thus firms cut back their own plans for further purchase of producer durable goods. Consumers cut back purchases of consumer durables. The increase in uncertainty caused by the stock market crash amplified the magnitude of the initial recession.

Contemplating the wreck of his country's economy and his own political career, Herbert Hoover wrote bitterly in retrospect about those in his administration who had advised inaction during the downslide:

The 'leave-it-alone liquidationists' headed by Secretary of the Treasury Mellonfelt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate'.He held that even panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. 

High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people'

But Hoover had been one of the most enthusiastic proponents of "liquidationism" during the Great Depression. And the unwillingness to use policy to prop up the economy during the slide into the Depression was backed by a large chorus, and approved by the most eminent economists.

For example, from Harvard Joseph Schumpeter argued that there was a "presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future." From Schumpeter's perspective, "depressions are not simply evils, which we might attempt to suppress, butforms of something which has to be done, namely, adjustment to change." This socially productive function of depressions creates "the chief difficulty" faced by economic policy makers. For "most of what would be effective in remedying a depression would be equally effective in preventing this adjustment."

From London, Friedrich Hayek found it:

...still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.

If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed. The only way permanently to 'mobilize' all available resources is, therefore to leave it to time to effect a permanent cure by the slow process of adapting the structure of production...

Hayek and company believed that enterprises are gambles which sometimes fail: a future comes to pass in which certain investments should not have been made. The best that can be done in such circumstances is to shut down those production processes that turned out to have been based on assumptions about future demands that did not come to pass. The liquidation of such investments and businesses releases factors of production from unprofitable uses; they can then be redeployed in other sectors of the technologically dynamic economy. Without the initial liquidation the redeployment cannot take place. And, said Hayek, depressions are this process of liquidation and preparation for the redeployment of resources.

As Schumpeter put it, policy does not allow a choice between depression and no depression, but between depression now and a worse depression later: "inflation pushed far enough [would] undoubtedly turn depression into the sham prosperity so familiar from European postwar experience, [and]... would, in the end, lead to a collapse worse than the one it was called in to remedy." For "recovery is sound only if it does come of itself.

For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead"

This doctrine--that in the long run the Great Depression would turn out to have been "good medicine" for the economy, and that proponents of stimulative policies were shortsighted enemies of the public welfare--drew anguished cries of dissent from those less hindered by their theoretical blinders. 

British economist Ralph Hawtrey scorned those who, like Robbins and Hayek, wrote at the nadir of the Great Depression that the greatest danger the economy faced was inflation. It was, Hawtrey said, the equivalent of "Crying, 'Fire! Fire!' in Noah's flood."

John Maynard Keynes also tried to bury the liquidationists in ridicule. Later on Milton Friedman would recall that at the Chicago where he went to graduate school such dangerous nonsense was not taught--but that he understood why at Harvard-where such nonsense was taught-bright young economists might rebel, reject their teachers' macroeconomics, and become followers of Keynes. 

Friedman thought that Keynesianism was wrong--but not crazy.

However, the "liquidationist" view carried the day. Even governments that had unrestricted international freedom of action--like France and the United States with their massive gold reserves--tended not to pursue expansionary monetary and fiscal policies on the grounds that such would reduce investor "confidence" and hinder the process of liquidation, reallocation, and the resumption of private investment.


Thus governments strained their muscles to balance their budgets--thus further depressing demand--and to reduce wages and prices--in order to restore "competitiveness" and balance to their economies. In Germany the Chancellor--the Prime Minister--Heinrich Bruening decreed a ten percent cut in prices, and a ten to fifteen percent cut in wages. But every step taken in pursuit of financial orthodoxy made matters worse.

For once the declines in wages and prices in the Great Depression had passed some critical value, they knocked the economy out of its normal business-cycle pattern. Severe deflation had consequences that were much me than an amplification of the modest five to ten percent falls in prices that had been seen in past depressions.

When banks make loans, they allow beforehand for some measure of fluctuation in the value of the assets pledged as security for their loans: even some diminuation of the value of their collateral will not cause banks to panic, because if the borrower defaults they will still be able to recover their loan principal as long as the decline in the value of the collateral is not too high.

But what happens when deflation reaches the previously never seen amount of thirty, forty, or fifty percent--as it did in the Great Depression? Banks become keenly aware that their loan principal is no longer safe: that if the borrower defaults, they no longer have recourse to sufficient collateral to recover their loan principal. if the borrower defaults, and if bank depositors take the default as a signal that it is time for them to withdraw their deposits, the bank collapses.

As Keynes, wrote, once banks realize that deflation has significantly impaired the value of their collateral:

...they become particularly anxious that the remainder of their assets should be as liquid and as free from risk as it is possible to make them. This reacts in all sorts of silent and unobserved ways on new enterprise. for it means that banks are less willing than they would normally be to finance any project...

In looking at the tracks of interest rates in the Great Depression, you can see a steady widening of the gap between safe interest rates on government securities and the interest rates that borrowing companies had to pay. Even though credit was ample--in the sense that borrowers with perfect and unimpaired collateral could obtain loans at extremely low interest rates--the businesses in the economy (few of which had perfect and unimpaired collateral) found it next to impossible to obtain capital to finance investment.

Thus the banking system freezes up. It no longer performs its social function of channeling purchasing power from savers to investors. As a result private investment collapses; falling investment produces more unemployment, excess capacity, futher falls in prices, and more deflation; and further deflation renders the banking system even more insolvent.

Moreover, not only past deflation but also expected future deflation depresses investment. Why invest now if you expect deflation, so that everything you would buy this year will be ten percent cheaper next year?

In the end the spiral of deflation will continue to depress the economy until something is done to restore solvency to the banking system, and break the anticipations of further falls in prices. A few economists understood this process at work during the Great Depression--Irving Fisher, John Maynard Keynes, R.G. Hawtrey--but they did not walk the corridors of power at the nadir of the Great Depression.

Golden Fetters

Countries without massive gold reserves did not have the luxury of even attempting to expand their economies, at least not until they abandoned the gold standard, let their exchange rates float freely, and so cast off their "golden fetters."

 A government that wished to stimulate demand in the Great Depression would seek to inject credit and bring down interest rates to encourage investment. But additional credit would mean higher imports, and lower interest rates would encourage domestic nvestors to invest abroad. The result would be a balance-of-payments gap: economic expansion at home was inconsistent with gold convertibility. And few countries wished to abandon the gold standard at the start of the Great Depression.

There were exceptions that proved the rule. Scandinavian countries cast off their "golden fetters" at the start of the Great Depression, pursued policies of stabilizing nominal demand under the intellectual influence of the Stockholm School of economists, and did relatively well. In Japan fiscal orthodoxy and budget balance were abandoned in 1931, when Korekiyo Takahashi became Minister of Finance. Industrial production in Japan in 1936 was half again as much as it had been in 1928; in Japan the Great Depression was over by 1932.

But these were unusual exceptions.

Before World War I the major industrial economies might have had some freedom of action. Before the war major industrial countries' commitment to the gold standard was unquestioned. Whenever an exchange rate fell to the lowest "gold point", the bottom of the band and the point at which it was profitable to begin shipping gold out of the country, capital would flow in betting on the future recovery of the exchange rate to the mid-point of its band, making the central bank's task of maintaining convertibility easy.

But in the 1920s, with governments under greater pressure from newly expande electorates to generate prosperity, it was not clear that the country was committed to the gold standard. Speculators, instead, began to pull their capital out of a country facing a balance-of-payments deficit, on the principal that the loss they would suffer should the currency recovery would be dwarfed by their profits if they could take advantage of a full-fledged devaluation.

With the growth of concern about currencies, central bankers wondered if the gold-exchange standard--by which they kept their reserves in sterling or in dollars--was wise. What if the pound or the dollar devalued? As the Great Depression gathered force, central banks fell back on gold as their principal reserve, increasing strains on the system.

One might have thought that those countries that had restored their pre-World War I parities would be immune from destabilizing speculation.

Had not Britain returned to the gold standard at the pre-World War I parity precisely to give investors confidence that its commitment to the gold standard was absolute?

But governments like Britain and the United States that had maintained pre-World War I parities found themselves lacking credibility. Because they had not experienced the 1920s as a decade of inflation, they lacked the tacit political consensus that inflation was to be avoided at all costs. By contrast countries that had undergone inflation in the 1970s found for the most part that they had high credibility, and that their exchange rates came under little speculative attack.

Austria's major bank, the Credit Anstalt, was revealed to be bankrupt in May 1931. Its deposits were so large that freezing them while bankruptcy was carried through would have destroyed the Austrian economy, hence the government stepped in to guarantee deposits.

The resulting expansion of the currency was inconsistent with gold-standard discipline. Savers liquidated their deposits and began to transfer funds out of the country in order to avoid the capital losses that would have been associated with a devaluation.

In order to keep its banking system from collapsing and in order to defend the gold standard, the Austrian central bank needed more gold to serve as an internal reserve to keep payments flowing and an external reserve to meet the demand triggered by incipient capital flight. The Bank for International Settlements began to host negotiations to coordinate international financial cooperation.

It is possible that rapid and successful conclusion of these negotiations might have stopped the spread of the Great Depression in mid-1931. Austria was a small country with a population well under ten million. There was not that much capital to flee. A sizable international loan to Austria's central bank would have allowed it to prop up its internal banking system and maintain convertibility.

A month later those whose capital had fled would realize that the crisis was over, and that they had lost a percent of two of their wealth in fees and exchange costs in the capital flight.

Other speculators would observe that the world's governments were serious in their commitment to the gold standard, that the potential foreign exchange reserves of any one country were the world's, and thus that the likelihood of a speculative attack succeeding in inducing a devaluation was small.

Perhaps investors would then have begun returning gold to central banks in exchange for interest-bearing assets, would have begun to shrink down their demand for liquidity, and would have begun to boost worldwide investment. The Economist's Berlin correspondent thought that it might well have done the job:

It was clear from the beginning... that such an institution [as the Credit-Anstalt] could not collapse without the most serious consequences, but the fire might have been localized if the fire brigade had arrived quickly enough on the scene. It was hte delay of several weeks in rendering effective international assistance to the Credit Anstalt which allowed the fire to spread so widely.

We don't know because it was not tried. The substantial loan to Austria was not made. Speculators continued to bet on devaluation, investors continued to hoard gold, the preference for liqidity continued to rise, and investment continued to fall.

The substantial loan to Austria was not made because French internal politics entered the picture. At the beginning of his political career French Premier Pierre Laval had styled himself a politician of the left: the Clarence Darrow of France.

But by the early 1930s he was shifting to the position of a strong nationalist. He blocked the proposed international support package for Austria, insisting that if France was to contribute France had to get something out of it.

The price that Laval demanded was made up of a series of diplomatic concessions, most important of which was the renunciation of a prospective customs union with Germany. To Laval, playing the nationalist card in French politics, nothing that benefited Germany could be allowed by France.

The Austrian government refused to make the required political concessions fast enough for negotiations to be completed in time to be of use. Austria lost: the support package collapsed, and the Austrian economy abandoned the gold standard and went into recession. In the long run France lost too: what might have been a chance to moderate the Great Depression was lost. The ultimate consequences for France were dire. The rise of Adolf Hitler in Germany is inconceivable in the absence of the Great Depression. Nine years after the Credit-Anstalt crisis the French government surrendered to the Nazis.

Pierre Laval was not greatly inconvenienced at first by the Nazi conquest of Europe. He discovered that he was not a leftist at all but a Fascist. He became the second most powerful figure, and the true focus of decision making, in France's wartime collaborationist Vichy government. He was executed for treason after the end of World War II.

Back in 1931, speculators observed that the international financial community did not support currencies that came under pressure. They wondered which country would be next to devalue--and thus which country to pull their money out of fast if they did not want to lose the thirty percent or so of gold value that would be lost in a devaluation. The wave of bear speculation moved on to Hungary, Germany, and Britain. By the fall of 1931 Britain had abandoned the gold standard.

Thus international capital flows--in this case driven by fear of being caught in devaluation--triggered devaluations and brought down the interwar gold standard. In a well-functioning gold standard, such impulses would have been damped by the credibility of the commitment to gold and by international cooperation. But in the early 1930s the commitment to gold had no credibility. And there was no international cooperation.

In the absence of international cooperation, the legacy of the gold standard was to make it impossible for any country to fight the Depression within its borders. Simulative monetary and fiscal policies were inconsistent with the gold standard. And efforts to contain domestic banking crises were thwarted and rendered counterproductive because of the fear that rescuing the banking system or lowering interest rates was the prelude to devaluation.

As Eichengreen has pointed out, once countries had cast off the golden fetters of the interwar gold standard, the crisis was transformed into an opportunity. Policies to expand demand and production no longer required international cooperation once the gold standard framework had been abandoned. But as he has also pointed out, "liquidationism"--and fears of financial and political chaos--kept governments from beginning to fight the Depression in a serious manner for much of the 1930s.

The Great Depression is the greatest case of self-inflicted economic catastrophe in the twentieth century.

As Keynes wrote at its very start, in 1930, the world was "... as capable as before of affording for every one a high standard of life.... But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand." Keynes feared that "the slump" that he saw in 1930 "may pass over into a depression, accompanied by a sagging price level, which might last for years with untold damage to the material wealth and to the social stability of every country alike." He called for resolute, coordinated monetary expansion by the major industrial economies to "restore confidence in the international long-term bond market... restore [raise] prices and profits, so that in due course the wheels of the world's commerce would go round again."

Charles Kindleberger has pointed out that such action never emerges from committees, or from international meetings. Before World War I the international gold standard was kept on track because there was a single, obvious, dominant power in the world economy: Britain. Everybody knew that Britain was the "hegemon", and so everyone adjusted their behavior to conform with the rules of the game and the expectations of behavior laid down in London.

Similarly, after World War II the "hegemon" for more than a full generation was the United States. And once again, the existence of a dominant power in international finance--a power that had the capability to take effective action to shape the pattern of international finance all by itself if it wished--led to a relatively stable and well-functioning system.

But during the interwar period there was no hegemon: no power could shape the international economic environment through its own actions alone. Britain tried, attempting to restore confidence in the gold standard by the restoration of sterling, and failed. America might have succeeded had it tried--but successful policy requires that the hegemon recognize its leading position, which the interwar U.S. did not do. Thus "resolute, coordinated" action to expand demand and halt the depression did not emerge from the leading industrial power. And it was very unlikely to be generated by any committee operating via consensus.

So the action was not forthcoming. And Keynes's fears came to pass.
T he Persistence of the Great  Depression

The "liquidationist" monetary-over investment view of business cycles collapsed in the Great Depression. It had provided a framework for economists to analyze the busts of the nineteenth and early twentieth century, but its interpretation of the Great Depression was absurd.

Periods of high unemployment lasted not for months or years but for decades. They lasted too long to be dismissed as frictions that resulted as the market reallocated productive resources away from what were now seen as low value goods.

In response to the high persistence of unemployment in the interwar years, economists abandoned the idea that business cycles were the economy's best feasible response to inevitable shocks to present circumstances and expectations about the future, and that the Great Depression had been generated by the largest such shock ever seen. Instead, they turned to alternative--Keynesian--approaches to explain the persistence of high unemployment, even though these alternative approaches were not so much theories of business cycles as policy recommendations accompanied by promises that supporting theories would be constructed later.

Economists today have faith in market economies' abilities to eventually cure depressions even in the presence of unsound economic policies. Depressions and high unemployment arise when markets malfunction, or fail to find the correct equilibrium. But excess supply of labor and excess supply of goods should eventually register. Economists track channel after channel through which the market economic system can right itself from a depression and restoer full employment equilibrium. How well did these "natural" full employment equilibrium-restoring forces work in the Great Depression?

The answer is: not at all well.

Some nations--Scandinavian countries that abandoned the gold standard early--experienced the Great Depression as little more than an ordinary recession, albeit in some cases beginning from a position of relatively high unemployment in 1929. The collapse of international trade in the 1930s idled resources in specialized export industries, but for countries that had abandoned the gold standard early domestic manufacturing took up the slack and returned GNP and employment to relatively high levels by the middle of the decade. These fortunate nations experienced the Great Depression as more-or-less another episode of "normal" cyclical unemployment in response to a large shock, in this case the world market's signal that export sectors were too large.

Other countries--largely nations like the United States and France that remained on the gold standard beyond 1930-31--were not so fortunate. Their unemployment rose to and remained at levels that seemed too high to square with the normal mechanisms of standard business cycles. Their experience was a key factor leading economists away from "monetary overinvestment" theories and toward "underemployment semi-equilibrium" theories.

Even granted that policies to fight the Great Depression were not forthcoming, the persistence of the Depression still comes as a shock. In a normal pre-Great Depression business cycle, the economy the economy closes 97% of the gap back to usual employment in three years. But the Depression shows a different picture: the economy closed only half of the gap back to full employment in three years.

It is helpful to group the explanations for why Depression-era unemployment was so high and lasted so long along two axes: there are two candidates to take the blame for the persistence of unemployment during the Depression: the government, and the market.

Government-generated unemployment was widespread. In Britain some unemployment (although a small share during the peak unemployment years of the early 1930's) was surely generated by the government's unemployment insurance system. Thomas cites Eichengreen's earlier work, which presented a best estimate that some two or three percentage points of unemployment in 1929-32 could be attributed to the operation of the relief system.

Thomas attributes some unemployment among secondary workers and unskilled young men with large families to the "OXO" system in which firms would systematically rotate two platoons of workers between time at work and time receiving unemployment benefit, thus turning unemployment insurance into a highly-subsidized work sharing scheme. Men receiving the standard unemployment benefit in February 1931 had on average experienced 8.6 different spells of employment during the past year, working an average of 151 days.

Given such rapid turnover it is not at all implausible to argue that the availability of unemployment benefit, even with relatively low replacement rates, allowed workers to remain in labor market positions in which they were employed only half the time instead of migrating to some other industry. Thus it is possible that an underlying four or five percent of excess British unemployment may well have been maintained by the government's social policy.

In the United States even at the very end of the Depression unemployment was high. In the 1940 census some 11.1% of U.S. heads of household were counted as unemployed, of whom almost half-4.9% of all heads of household-held relief jobs. Michael Darby has argued that the government had managed to create a situation in which those on relief found themselves with little incentive to register their labor supply on the private-sector job market, and yet were doing little socially productive work. Relief jobs were attractive to many, in spite of their low levels of relief wages relative to average private sector wages. Relief jobs were secure and required little skill. The risk-averse or the lesser-skilled might well have found that their best option was to stay on relief jobs, and be counted as unemployed, rather than take even an immediately available private sector job.

In each of these cases there is no clear alternative way of organizing the unemployment insurance system that would have been a clearly better policy. A good society should offer support to those blocked from earning their wages in the market. And a well-functioning economy should create incentives for the unemployed to strongly register their excess supply of labor in the market. These two goals are inevitably in tension.

 The inescapable problem was that relief payments were too high for the short-term and too low for the long-term unemployed, and that there was no good way to structure relief programs to tell these two groups apart ex ante. William Beveridge was among the first to lay out the policy dilemma: the long-term unemployed "need... more money rather than less than those who have had short periods of unemployment. Yet they can hardly be given more money without... [creating an incentive] to settle down into permanent unemployment."
 Moreover, few of the long-term unemployed "escape physical and psychological deterioration through long idleness."

Nevertheless, a large part of the puzzle remains: roughly half of Depression unemployment was concentrated among long-term unemployed who could not take advantage of subsidized relief-work schemes.

This form of unemployment, principally long-term and somewhat of a residual category is, in the eyes of Eichengreen and Hatton and their contributors, the key to the persistence of the Depression. Long-term unemployment was strongly present in those countries that suffered worst from the Depression, including non-European nations like Australia, Canada, and the United States and European nations like Britain, Germany, Italy, and the gold block nations of France and Belgium. Of these only Germany achieved a strong recovery from the Depression in the 1930's.

Long-term unemployment means that the burden of economic dislocation is unequally borne. Since the prices workers must pay often fall faster than wages, the welfare of those who remain employed frequently rises in a depression. 

Those who become and stay unemployed bear far more than their share of the burden of a depression. Moreover the reintegration of the unemployed into even a smoothly-functioning market economy may prove difficult, for what employer would not prefer a fresh entrant into the labor force to someone out of work for years? The simple fact that an economy has recently undergone a period of mass unemployment may make it difficult to attain levels of employment and boom that a luckier economy attains as a matter of course. Once an economy had fallen deeply into the Great Depression, devalued exchange rates, prudent and moderate government budget deficits (as opposed to the deficits involved in fighting major wars), and the passage of time all appeared equally ineffective ways of dealing with long-term unemployment. Highly centralized and unionized labor markets like Australia's and decentralized and laissez-faire labor markets like that of the United States did equally poorly in dealing with long-term unemployment. Fascist "solutions" were equally unsuccessful, as the case of Italy shows, unless accompanied by rapid rearmament as in Germany.

Even today, economists have no clean answers to the question of why the private sector could not find ways to employ its long-term unemployed. The very extent of persistent unemployment in spite of different labor market structures and national institutions suggests that theories that find one key failure responsible should be taken with a grain of salt.

But should we be surprised that the long-term unemployed do not register their labor supply proportionately strongly? They might accurately suspect that they will be at the end of every selection queue. In the end it was the coming of World War II and its associated demand for military goods that made private sector employers wish to hire the long-term unemployed at wages they would accept.
At first the unemployed searched eagerly and diligently for alternative sources of work. But if four months or so passed without successful reemployment, the unemployed tended to become discouraged and distraught. After eight months of continuous unemployment, the typical unemployed worker still searches for a job, but in a desultory fashion and without much hope. And within a year of becoming unemployed the worker is out of the labor market for all practical purposes: a job must arrive at his or her door, grab him or her by the scruff of the neck, and through him or her back into the nine-to-five routine if he or she is to be employed again.

This is the pattern of the long-term unemployed in the Great Depression; this is the pattern of the long-term unemployed in western europe in the 1990s. It appears to take an extraordinarily high-pressure labor market, like that of World War II, to successfully reemploy the long-term unemployed.

Despite the fact that nearly everyone in the country was hurt to some degree by onset of the Depression, the 1930's was a period of exacerbated class conflict. One possible reason for this was the divergent responses which upper and lower class individuals had to the crisis. While many of the richest people in America lost money when the stock market crashed, the upper classes as a whole still retained much of the wealth which they had held before the Depression and in most cases did not suffer from unemployment. Perhaps as a way of displaying their continued prosperity in the face of nationwide suffering (or of trying to show up their social equals who may have been hit harder by the crash) many among the upper classes began to flaunt their wealth more than ever.

Working class Americans, many of whom were thrown out of work by the Depression (which they often correctly blamed upon the reckless financial dealings of the upper classes) were shocked and angered by this ostentatious display of wealth.

The upper classes, on the other hand, began to resent their social inferiors (as they saw the lower classes) even more than ever, particularly after the institution of the a number of New Deal programs which were paid for out of taxes on those who still had an income.

They often viewed such programs as hand outs, which, as can be seen in this cover, were not something which the upper classes felt was their responsibility to provide. They were further angered by the actions of President Roosevelt, who catered to the mass of Americans while largely ignoring the interests of the upper classes. 
These factors served to heighten class tensions during a period when many Americans (both rich and poor) were already tense over their financial futures.

Amid this tension, class conflicts often became very visible and even violent, especially in cases of worker strikes. New Deal regulations helped foster significant unionization and these unions would often run into conflict with company hired police forces. Such conflicts, like the Memorial Day Massacre in Chicago, often left people dead on both sides. Upper class Americans, sensitized by the Russian Revolution not two decades before, feared that a class war might be on the horizon as a number of workers joined the Communist party. While these violent conflicts never reached such a boiling point (thanks largely to the New Deal programs which many among the upper classes opposed) fears of this sort helped contribute to a general suspicion on both sides for the entire decade of the thirties.

The main cause for the Great Depression was the combination of the greatly unequal distribution of wealth throughout the 1920's, and the extensive stock market speculation that took place during the latter part that same decade. The maldistribution of wealth in the 1920's existed on many levels.

 Money was distributed disparately between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. and Europe. This imbalance of wealth created an unstable economy. The excessive speculation in the late 1920's kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the mal-distribution of wealth, caused the American economy to capsize.

A major reason for this large and growing gap between the rich and the working-class people was the increased manufacturing output throughout this period. From 1923-1929 the average output per worker increased 32% in manufacturing. During that same period of time average wages for manufacturing jobs increased only 8%. Thus wages increased at a rate one fourth as fast as productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into corporate profits. In fact, from 1923-1929 corporate profits rose 62% and dividends rose 65%.

The large and growing disparity of wealth between the well-to-do and the middle-income citizens made the U.S. economy unstable. For an economy to function properly, total demand must equal total supply. In an economy with such disparate distribution of income it is not assured that demand will always equal supply. 

Essentially what happened in the 1920's was that there was an oversupply of goods. It was not that the surplus products of industrialized society were not wanted, but rather that those whose needs were not satiated could not afford more, whereas the wealthy were satiated by spending only a small portion of their income.

Through such a period of imbalance, the U.S. came to rely upon two things in order for the economy to remain on an even keel: credit sales, and luxury spending and investment from the rich. he U.S. economy was also reliant upon luxury spending and investment from the rich to stay afloat during the 1920's. The significant problem with this reliance was that luxury spending and investment were based on the wealthy's confidence in the U.S. economy. If conditions were to take a downturn (as they did with the market crashed in fall and winter 1929), this spending and investment would slow to a halt.

All of the sudden warehouses were piling up with inventory. The thriving industries that had been connected with the automobile and radio industries started falling apart. Without a car people did not need fuel or tires; without a radio people had less need for electricity.

On the international scene, the rich had practically stopped lending money to foreign countries. To protect the nation's businesses the U.S. imposed higher trade barriers (Hawley-Smoot Tariff of 1930). Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew to five million in 1930, and up to thirteen million in 1932. The country spiraled quickly into catastrophe.

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery.

But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

Workers who kept their jobs, even with reduced hours, and financiers whose money was invested in bonds prospered during the Depression. Their nominal incomes in dollars dropped, but prices dropped even more: the baskets of goods they could buy increased. Farmers, workers who lost their jobs, and entrepreneurs who had bet their money on continued prosperity were the big losers of the Depression. Production was a third less than normal and the distribution of income had shifted toward those who kept steady employment or who had invested their financial wealth conservatively. As a result, at the nadir the standard of living of losers taken all together was perhaps half of what it had been in 1929.

The restriction of immigration after 1920 also diminished the supply of unskilled, newly-arrived workers competing for low-level urban jobs. This made the distribution of income and wealth within America more equal. 

While this is only a short synopsis, I think you get the gist of it.

Does it sound familiar? It's scary to think of, but.....It is scary to think about what would happen today if we were to go into another Great Depression. Right now as it stands the United States has a huge amount of debt caused by the war and George W. Bush's tax cuts for the richest ten percent of Americans. If we are not careful and continue down the same path we very well may end up living another Great Depression, and this time we don't have a President Roosevelt to save the country. Instead we have a President who seems to be helping the richest of Americans with tax cuts and laying the debt that he has created on working class citizens and unfortunately the next generation to come. Recently congress raised the minimum wage to help blue collar Americans, but with the huge tax cuts for the rich and the overwhelming cost of an ongoing war, it isn't much help, especially considering the amount of taxes the working class has to pay will increase with the minimum wage, leaving them not much better off than before the wage increases.

So if we are heading towards another Great Depression, what will be our New Deal?
Well, if you want to bring up the topic of the Great Depression, Mark, I hope you'll take the time to emphasize the under-appreciated fact that the Great Depression continued on as long as it did for only one reason: the Federal Government did not increase its spending enough to eliminate unemployment until World War II began. When it finally did start spending money in a big way (on armaments, soldiers' training, etc.) unemployment dried up almost over night and the Great Depression was finally over.
Roosevelt's Congress did not authorize enough spending because too many members of the Republican opposition (and 'respected' members of the banking community and economics profession) warned that the consequences of 'inflating' the economy would be disastrous. It's too bad Congress listened to them. Millions of people suffered terribly for no good reason.
And while you're ignoring this aspect of the discussion, Mark, you might also want to ignore---once again---the lesson of the Balanced Budget Multiplier. (Raise taxes to increase output?!! What would the Republicans say about such heresy?)
The Great Depression began in October 1929, when the stock market in the United States dropped rapidly.
Thousands of investors lost all of their of money and were forced to live on the streets often going without food. This crash led into the Great Depression.
The ensuing period of 10 years ranked as the worst period of high unemployment and low business activity in modern times.
 Banks, stores, and factories were closed and left millions of Americans jobless, homeless, and without food.
Many people came to depend on the government or charity to provide them with food.
The Depression became a worldwide business slump of the 1930's that affected almost all nations. It led to a sharp decline in world trade as each country tried to protect their own industries.
The Depression led to political turmoil in many countries such as Germany where poor economic conditions helped lead to the rise of Hitler. Franklin D. Roosevelt was elected President in 1932 and his 'new deal' reforms gave the government more power and helped slow the depression.
The Great Depression ended as nations increased their production of war materials at the start of World War II.
 This increased production provided jobs and put large amounts of money back into circulation.
Several factors led to the great depression.
One being the lack of diversification in the American economy.
 The prosperity of America had been basically dependant on a few industries like construction and the automobile and in the late 20's these industries started to fall.
When those two industries began to decline there was not enough strength in the other sectors to keep the economy strong.(
Another major factor in the depression was the poor distribution of wealth throughout the 20's companies were doing very well and making loads of money.
However there workers wages were not increasing nearly as fast as the companies profits.
As industrial and agricultural production increased, the amount of the profits going to farmers, factory workers, and other potential consumers was far too small to create a market for goods that they were producing. Even in 1929 when the economy was flourishing after 10 years of growth almost half of the families in America where living below the poverty line and could not afford the goods the industrial economy was producing.
As long as factories continued to expand their factories the economy remained strong. However they soon had created more plant space that could be profitably used. Factories were putting out more goods than consumers could buy.  <!--[if !vml]--><!--[endif]-->
The poor credit structure of most banks in the 20's also helped lead to the depression. Farmers who were already in debt saw crop prices drop sharply in he late 20's. This greatly hurt the banks, especially those involved with the agricultural economy because the farmers crops prices were too low for them to pay of their debt. This led to many failures among smaller banks. The banking system was not ready to handle the depression. Some the countries largest banks put far too much money into the stock market and did not save enough.
A major factor in the great depression was the breakdown of international trade. Nations began to protect domestic production from foreign imports by raising the tariffs to unprecedented levels. President Herbert Hoover raised the tariffs to level which practically closed the United States borders when he enacted the Hawley-Smoot Tariff act in June 1930.
 This caused devastating collapse of American agriculture, the most important export industry. American foreign trade greatly slowed as did world trade. The European industry and agriculture grew in the 20's and European countries were growing too poor and could not afford to buy goods overseas.
This led to a decline for the need of U.S. goods in Europe. After WW1 allied nations of the United States all were in debt to them. This is why the allied nations insisted that Germany and Austria pay the reparation payments. They thought this would give them away to pay of their own debts. However Germany and Austria were also struggling and could not afford to pay the reparation payments. The allies of the U.S. began getting large loans from US banks to repay their debt to America. So they only repaid one debt by building up a new one. When the US economy began to weaken it made it harder for European nations to borrow money from the US and the high tariffs made it very difficult for them to sell there goods. They now had no way to repay their debts or build up money.

The Great depression in Canada did not start for all the same reasons as the Depression in America. Canada prospered in the 20's. It was the worlds largest export of wheat and it helped make Canada one of the worlds leading traders. However this was only because of problems in other places of the world. The Russian revolution stopped Russia from trading their wheat, and WW1 had devastated other countries throughout Europe. However the European countries recovered and Russia came out of their revolution and again started to produce Wheat. And although the demand for Canadian wheat was not as high anymore they still produced just as much. Instead of cutting back on production farmers kept there excess wheat in wheat stacks and much of it went to waste. By 1929 there was a complete collapse of the economy in the prairie provinces. Although Canada did not have as much money involved in the stock market as America, the two countries were so close economically, the drop in the states soon had just as big an impact in Canada.
Investment during the 1920's was based on the unstable basis of margin buying. Investors bought borrowed money from their brokers, who went to banks for that money. When stocks failed and investors needed to default, the money was permanently lost .The crash of 1929 ended the seemingly infinite prosperity of the 1920s. Millionaires had become paupers overnight. Those who believe in the strength of the economy, invested everything they had and then lost everything they had. Of course, the economy weakened and the unemployment skyrocketed from 3% to 25%. The Great Depression had begun.
The Great Depression effected practically every nation in the world. In Germany, the poor economy and high unemployment rate helped lead to the overthrow of the Weimar republic and the rise of Hitler. The American president greatly underestimated the effect of the stock market crash and made very weak efforts to control the situation. He eventually went to congress to ask for a 150 million dollar public work program to help the economy and to create more jobs. There was no Federal overseeing of the stock market and after the crash many stock and investments were found to be frauds. Many banks had invested in these frauds and lost tons of money which led to a collapse of the banking system.
So therefore the public work program could never happen and there was just not enough money to fund any sort of program. The American government did little to help the situation, if anything they made it worse by raising interest rates believing inflation was the problem. Canada had some advantages over other countries, it had a very stable banking system, during the entire depression 9000 banks collapsed in the U.S., only one bank collapsed in Canada. However no other country was hurt worse when the U.S. raised their tariffs because it relied so heavily on trade with America.(ibid)
Every class was hit hard by the depression. For farmers, there crop prices were so low they did have enough money to pay of loans and many lost their farms and homes. For the working class, 1 in 4 lost their jobs, with no source many lost their homes and had to struggle to get food to feed their families. The upper class was badly hit, some went from having millions of dollars in stocks and living in huge homes to having nothing and living on the streets.(ibid)
The Great depression never truly ended in America until the start of World War, however the New Deal also helped slow the depression. When the war started it immediately created jobs. many men where sent over to the war and those who were not got jobs building war materials.
President Roosevelt's "new deals" also helped bring an end to the depression.
The plan for the New Deal programs were to provide work and relief for the population living below poverty and to increase government spending. The theories of the New Deal was backed up British economists John Keynes . Between 1933 and 1939 government spending tripled.
The New Deal worked out just as Keynes and the Roosevelt administration had predicted.
America slowly crawled its way out of the depression and again became a productive nation partly by the New Deal, but most of all by the start of the second world war.
 In Canada, Richard Bennett was elected Prime minister in 1930. He, like the U.S. immediately raised the tariffs.
Many make-work programs were started welfare support quickly grew. However this led to a large federal deficit and Bennett cut back on government spending.
A great burden on the country was Canadian National Railway, the government had to take over many railways and from that took in a debt of over two billion dollars. After seeing president Roosevelt's New Deal policy having good results in the U.S. Bennett introduced policies based on the New Deal.
Bennett started up minimum wage and unemployment insurance. However Bennett’s attempts to revive the economy were not nearly as successful as Roosevelt's.
As a result the depression was worse in Canada than in the U.S., and this led to the defeat of Bennett in the 1935 election to liberal Mackenzie King. Like in the U.S. the Great Depression did not end until the outbreak of the Second World War. A boost in the economy was created by a strong demand of Canadian goods in Europe and an increase of government spending.

The Right Genuinely Views The Middle Class As Parasites Who Must Be Faced Down By Force Of Arms.

August 15, 2011 by Bob Livingston

Last week, the U.K. burned. Several nights of rioting, looting and general mayhem began in a London neighborhood following the police shooting of a black man (who was armed with a blank pistol) and spread across the country.

Simultaneously, a quarter of a million people took to the streets of Tel Aviv, Israel, to protest the rising cost of living. CNBC reported the protests actually began a month previous when some people set up tents in an expensive part of town to protest rising property prices.

In Spain, Greece and Portugal, strikes, protests and rioting have occurred off and on for much of the spring and summer over government austerity measures and corruption. 

Rising prices of consumer goods fueled demands for better pay and job protection by workers in the Philippines in May. Workers left their jobs and marched in the streets.

In China, Syria, Egypt, Libya, Bahrain, Algeria, Jordan, Morocco, Oman, Saudi Arabia, Yemen, Sudan, Iran, Lebanon and Kuwait, people have risen up in protests of varying degrees. Some of these led to a change in government, some fizzled out, some have been bought off and some have been quashed by violent repression.

While none of these protests are exactly alike and the spark that ignited them often came from different sources, they do have some common traits. Among them are the roiling economy, inflation, loss of liberties, class warfare and seemingly hopeless job prospects.

In Great Britain, Spain, Greece and Portugal, the protests demonstrate the failure of socialism.

Governments have run out of money, so they are cutting back on programs supporting the parasite class that developed off government largess. The crash of the economy has left many without jobs, and cutbacks in unemployment, food subsidies, housing subsidies, education subsidies, healthcare subsidies and the like are either being implemented or discussed.

That’s not sitting well with the parasites who grew dependent on the nanny state and have seethed and simmered over the injustices — whether real or perceived — they have endured. They’ve heard the elected elites blame the rich for their troubles, so they’re lashing out at those they consider “rich.” It doesn’t matter to them that these “rich” people are their neighbors and they’re burning down their own neighborhoods. All that matters is the rich have “stuff” and the parasites want “stuff,” so smashing windows, looting, robbing and setting fires have become legitimate things for them to do.

Kids as young as 7 or 8 were photographed looting stores of everything from liquor to clothing to expensive electronics. Drunken teenage girls were questioned by journalists about why they were burning and looting their own neighborhoods, and they responded with the incomprehensible, “Because they are rich.”

May this be a foreshadowing of what’s coming to America? We certainly have some of the same conditions here: long-term high unemployment, politicians playing the class-warfare game, government corruption, rising prices, austerity measures, a culture of dependency and elected elites ignoring the will of the governed. All that’s lacking is the right spark.

The potential for that spark is certainly there. Already in cities across the country there are almost daily reports of flash mobs looting stores and robbing and beating innocent bystanders. At the Wisconsin State Fair in Milwaukee there was a violent incident on Aug. 5 of blacks attacking whites.

Wisconsin, of course, was the scene of protests over austerity measures that curtailed some of the bargaining rights of public sector unions. Again, the parasite class living off the sweat of the producers enjoyed benefits far exceeding those available in the private sector, and they didn’t like losing even a small percentage of their perquisites.

Meanwhile, the elites in Washington, D.C., continue to fiddle while the American economy burns. They failed to make any significant cuts in government spending and Standard & Poor’s downgraded America’s sovereign credit rating from AAA to AA+. The result: The stock market reacted by dropping more than 634 points in three days. And that’s on top of a 1,341 point drop while Congress and President Barack Obama dithered.

People are growing increasingly desperate. There are a growing number of reports of people stealing metal items of all sorts — from doors at construction sites to manhole covers to copper wire — as items for recycling in an effort to find the money to stay alive. States and municipalities are considering setting up tent cities to accommodate the growing number of homeless people… many of them driven out of their homes because they have lost their jobs and have found no prospects for meaningful employment.

The Obama Administration is considering using government-owned foreclosure properties as rental housing, but how will people pay the rent if there are no jobs? And how will companies — particularly small businesses, which are the backbone of the economy — add jobs if there is no one who can afford to buy their products and the government continues to stifle business expansion because of increasingly stringent regulations and uncertainty about what it might try to implement next?

I hope you have stored food and water, gold and silver, weapons and ammunition and non-hybrid seeds, as I have long advised. It’s looking more and more like you will need them sooner rather than later.

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