Authors:
Historic Era:
Historic Theme:
Subject:
November 1991 | Volume 42, Issue 7
Authors:
Historic Era:
Historic Theme:
Subject:
November 1991 | Volume 42, Issue 7
On a hot July night about fifteen years ago, a young New Yorker on his way out for the evening decided on a quick shave. When he flicked on his electric razor, however, the lights in his apartment went out. From his window he could see that the lights all over New York had gone out as well. Standing there in the darkness, the now useless razor still in his hand, the young man was certain, understandably enough, that somehow he had personally caused the great blackout of 1977. He hadn’t, of course; he was confusing coincidence with causation.
History is full of such confusions. Probably the most famous is the stockmarket crash of 1929 and the Great Depression of the 1930s. Certainly, viewed from a distance of more than half a century, the market panic appears to have been immediately followed by a failing economy that spiraled downward into the awful abyss whose bottom was reached only in 1933. No wonder many people think the Crash “caused” the Depression.
But to those who lived day to day through those events, matters seemed far less tidy. The stock market rebounded in early 1930, for instance, regaining 50 percent of the ground it had lost in the debacle of October. As late as June of that year, fully eight months after the Crash, President Hoover was able to tell a group of clergymen who visited the White House to urge a public works program, “You have come sixty days too late. The Depression is over.”
In truth, the Crash of 1929 was an effect, not a cause, of the economic forces at work. The national economy had begun to move into recession in the summer of 1929, while the psychology of greed was still firmly in the saddle on Wall Street. Yet financial panics are called panics precisely because they are essentially psychological, not economic, events.
But if Wall Street can’t be blamed for the Great Depression, who can be? My candidate is Washington, D.C., for in the years 1930-33 three fateful government policies were relentlessly pursued and turned a heretofore ordinary recession into a calamity.
First, Congress passed the beggar-thy-neighbor Smoot-Hawley Tariff, the highest in American history. This forced other industrial countries to retaliate, and world trade collapsed. (Indeed, it was to be lower in 1939 than it had been in 1914.) The tariff, far from saving the American market for American workers, cost the jobs of millions of people here and abroad.
Second, the Hoover administration insisted on trying to balance the federal budget in the face of steeply declining tax revenues. Government spending diminished while the greatest percentage tax increase in American history was passed in 1932, when the economy was in virtual free fall.
Finally, the Federal Reserve maintained an anti-inflationary policy, adopted at the height of the boom, while the American economy underwent its greatest-ever deflation. In effect, the Federal Reserve kept treating the patient for fever long after