Lessons to be learnt from great Wall Street Crash

Click to follow
The Independent Online

The philosopher George Santayana said: "Those who do not remember the past are condemned to repeat it."

We are in the sixth year of the financial crisis which started in 2007 and experiencing problems reminiscent of the Great Depression with faltering economic growth, high unemployment, deflation, and a damaged banking system. It's unsurprising that commentators and policy makers would look to that period for lessons.

However, what we need to learn from the Great Depression is a firm grasp of what happened. Most of what I hear or read is along the lines of: the Great Depression was triggered by the Wall Street Crash, itself the result of laissez faire capitalism. The Depression was deepened as a result of the failure of governments to adopt Keynesian techniques to stimulate demand and by adherence to the Gold Standard. It was only when Franklin D Roosevelt took office and implemented the New Deal that America began to recover from the Depression as these Keynesian methods stimulated demand.

Sadly, this version owes more to myth than reality. Firstly, the idea that laissez faire free market policies were the root cause of the Crash and Depression is untrue. In fact Herbert Hoover who preceded Roosevelt as President until 1932 was criticised by FDR for "reckless and extravagant spending" and "thinking we ought to control everything in Washington", and he introduced the Smoot-Hawley Tariff in 1930 which stopped many imports. The dramatic contraction of the money supply by the Fed which began in 1929 and the rise in interest rates from 1928 helped to cause and then exacerbate the impact of the Crash. This was not simply a failure of capitalism or free markets. It had a lot of help from the government. The Hoover administration was interventionist and its interventions made matters worse.

But surely all this changed after FDR said: "We have nothing to fear but fear itself"? Roosevelt announced spending of $10bn when government revenues were $3bn pa, and government spending rose by 83 per cent between 1933 and 1936 whilst Federal debt rose by 73 per cent.

Many measures were implemented which were a drag on economic activity. .How these anti-competitive and bureaucratic measures were supposed to promote activity is a mystery. Far from ending the Great Depression, these measures prolonged it.

They were accompanied by a series of anti business and "soak the rich" tax provisions. The top marginal rate of income tax was raised first to 79 per cent then to 90 per cent, personal tax exemption was lowered to just $600pa, estate tax went up to 70 per cent and gift tax to 52.5 per cent. Corporate taxes were also raised with surtaxes for undistributed profits.

Unsurprisingly the economy slumped back into Depression in 1938 and the stock market halved again from 1937-38, which can hardly have been the result of laissez faire capitalism. FDR acolytes claim this was due to the Supreme Court outlawing the NRA and premature attempts to cut spending and balance the budget. But it is estimated that the reduction which resulted from this was only about 1 per cent of GDP which was far too small to cause the problem – just as austerity cannot now be the cause of the UK's problems because there hasn't been any yet. Government spending has continued to rise inexorably since the coalition took office.

By the time war broke out in 1941, unemployment was still 17 per cent. Hardly a triumph for two presidential terms of Keynesian policies.

So what did pull America out the Depression? The Second World War? America's involvement in the war was unique. It did not join the war until two years after it started, allowing America to benefit from the rearmament of the Allies as the "arsenal of democracy", to quote FDR.

The war was then followed by the Truman administration which was far less anti-business than FDR's. This combination of factors was the cause of recovery.

We have to learn from history if we are not to repeat its mistakes, but we will learn nothing if the experiences of history are heavily edited to suit political agendas and prejudices. We need to be told the truth.