This Is Not The Great Depression … Yet
In the wake of the coronavirus shutdowns unemployment numbers have reached levels not seen since the Great Depression: 30 million people have filed unemployment claims, and movie theaters, car dealerships, and amusement parks are sitting idle. Even as political leaders face pressure to revoke closure orders, polling shows that most Americans are reluctant to venture out before they feel safe, which will almost certainly mean that economic recovery will be slow. But it could be worse—much worse, as the generation of the 1930s learned the hard way. Now, as state and federal lawmakers face pressure to “do something” about the economy, it’s crucial that they remember the hard lessons of the Depression and avoid repeating mistakes made then, which transformed the market crash of 1929 into a generation-defining catastrophe.
The 1929 collapse was hardly the first economic panic in American history. Periodic “hard times” have always been a fact of life, and there had even been a sharp depression in the 1890s, one clearly remembered by many of those who experienced the crash in 1929. There had also been horrific natural disasters, such as the San Francisco earthquake of 1906, which caused drastic economic shifts and spikes in unemployment. What was different about 1929 was the decision by political leaders, particularly President Herbert Hoover and his successor, Franklin Roosevelt, not to face the hard times with the market-based solutions that had worked before, but with government-controlled “recovery” schemes instead—schemes that actually wasted resources, delayed recovery, and weakened the market’s ability to bounce back.
Hoover’s primary goal in response to the downturn was to keep wages high, prevent unemployment, and resist the fall in prices for crops. “If prices are high, they mean comfort and automobiles,” he told a reporter, “if prices are low, they mean increasing debt and privation.” This was economic quackery, because lower prices are caused by excess supply, and the resulting price drop is a signal that capital should be devoted to some other line of production instead. True, falling asset prices in the overextended state of the 1920s stock market were destined to cause severe ripple effects. But rather than allow investors and consumers to reallocate their resources as they needed, the Hoover administration focused instead on artificially propping up the prices for goods: subsidizing farmers not to grow things and adopting the now-infamous Smoot-Hawley tariff, which even John Maynard Keynes—hardly an advocate of laissez-faire—regarded as insane. That tariff made goods more expensive for consumers who were losing their jobs, just as artificially increased crop prices made it harder to put food on the table.
At the same time, Hoover sought to reduce unemployment with a massive public works program, building dams and bridges in order to hire people onto the government’s payroll. The result was to create an illusion of recovery, when in reality capital that the market needed to build a sustainable recovery was actually being diverted into channels controlled by politicians. What’s more, the workers hired on to such projects were typically those with more skills—which meant the program failed to help those who were suffering the most.