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A Fireside Chat

History doesn’t repeat itself.  As the cycles rise and fall there are always different circumstances, new actors and a different spirit in the people.  Somehow, it seems, we even learn a thing or two along the way.  As we confront the possibility of a new Depression we can see that our leaders are responding to it in a way that may make all the difference.  First, however, it’s good to take a look back at what worked the last time – and what didn’t.

When FDR took office, the nation had already fallen hard.  A third of all workers were on the street and banks were starting to fail rapidly.  The previous administration had done nothing to help the situation, appearing to stand at a safe distance that allowed them to watch the wreckage fall.  When it was FDR’s turn to take action, he took it decisively.

That’s not to say he knew exactly what to do.  In fact, he admitted openly to his aides that since there was no precedent to the situation, they were going to try anything and everything to get the nation moving again.  The one thing they were sure of was that there was an excess of production that was driving down prices and ruining entire industries at once.  The solution was the National Recovery Administration (NRA) that would be a temporary suspension of the Sherman Anti-Trust Act, allowing companies to form cartels and fix prices.

Many other programs comprising the “alphabet soup” of recovery acts were put into action.  The most successful were the Works Progress Administration (WPA) and Civilian Construction Corp (CCC), which provided jobs rather than blank checks.  But these were generally underfunded because there was a general belief that massive budget deficits would only make things worse.

As time went on, the headline NRA proved less successful than hoped, and may have made things worse.  Eventually, the arrival of World War II created the transformation that brought us out of the Depression.  Wars are, rightly, seen as events of mass slaughter, but they are also times when governments spend tremendous amounts of money they have to borrow.

This was the stimulus that ate up the excess capacity, created jobs, and transformed American in ways never imagined.  By the time the war was over farmers had moved in from the countryside, blacks migrated north into cities, and California started to develop rapidly.  We achieved the restructuring that is essential for escaping a Depression and greeting a new world.

This time, Obama inherited a very different world.  We are no longer shy about deficit spending, and the previous administration certainly did their part.  It didn’t entirely work.  While we don’t have the unemployment that was at the core of the last Depression, the reasons are more subtle; the over capacity lies in the manufacturing centers which are located oversees.  Our main problem is reliance on the financial sector that died a fairly quick death in something like a giant Ponzi Scam.

What can we learn from this?  Interestingly, our reaction to this downturn has been exactly opposite our reaction to the last one.  We’ve done all the things that they should have done, avoided the big mistakes, but not taken any action to provide jobs or stabilize our financial sector with an insurance program.

Does this mean that our leaders believe FDR was wrong about everything?  I admit, I’m starting to wonder a little bit.  The one thing that escaped us the previous downturn seems to be the one thing that is being stressed heavily, which is deficit spending to keep the economy running.  Programs like the WPA provided immediate relief for individuals while starting the process of transforming the nation that would be completed in the War; these are suspiciously absent today.

FDR knew that the nation needed to be transformed to get out of the problem, but they weren’t sure how to do it.  In the end, they guessed wrong on a few key things but events conspired to do it anyway.  Our leaders are clearly trying to not repeat the same mistakes, but in the process may be missing a lot of things that worked well the last time around.

Most important of all, the spirit of trying anything that seems reasonable and working towards a wholesale transformation of our economy are simply not part of the situation.  That may yet have to change.

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15 thoughts on “A Fireside Chat

  1. The proximity of the end of the great depression to the onset of World War II leads to the misconception that the later produced the former. A close examination of changes in the GDP shows this is poorly supported.

    In 1929 the US GDP was $865.5 billion (chained 2000USD). This dropped until 1933. By 1936 it had recovered to approximately the same level as ’29 and by ’40 it reached $1,034.1 billion. From the abyss of $704 billion in ’34 to the level of 1940, the rate of growth was nearly 6% annually (prior to lend lease). This was not the white hot economy of the war years, but it certainly shows there was solid expansion for over half a decade prior to the war.

    FDR wasn’t “lucky” that the war happened and it bailed out an economy stuck in the doldrums. It didn’t happen that way.

  2. I believe you are right. I always take GDP based arguments. I will re-think the entire need for deficit based stimulus, then, because the deficit up to preparations for WWII was tiny, around 0.5% of GDP.

    That suggests that the most important thing was redistribution, not actual stimulus. I may have bought into some propaganda unknowingly. Thanks for calling me on it.

  3. Another very good essay. I am myself a little bit scared of cycle theory especially as it represents itself biologically. Hitting the very young hard. It didn’t used too but I’m older now with kids almost grown. Perhaps biology is destiny.
    You are right on with the description of small farmers and southern migration into industry. One of the truly BIG movement(s) was widespread distribution of electricity which changed farming when it happened. I remember an uncle showing off his new creamer and distribution of dairy appliances. Another young aunt remembers electrical lighting and the homestead. Electricity also changed industry and certainly media thru radio which Hitler also used successfully.
    There is some evidence that the WPA may have been less successful the the CCC in creating jobs. If you want evidence I can provide but its also interesting to google.
    I enjoyed visiting a CCC camp south of Blackduck MN near Bemidji and talking to a real old timer. There is something about it that is haunting to me.
    What do you think will be the new tech besides modernizing railroads/transport and gene therapies?

  4. I will add an additional note. One can visit some MN waterfowl refuges that were improved by the CCC. And by improvement it was creating waterfowl enhancements because the soil was considered unfit for agriculture.
    Rice Lake Waterfowl Refuge near Aitkin. Tamarac Refuge near Park Rapids. Both are actually fun places of course it helps to enjoy nature the bugs can be bad.
    There are other more isolated waterfowl refuges that are haunting in their own way in WI and MN.

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