the Great Depression and Extending the Greater Depression
on Revolution in Egypt and Beyond
Here at Casey
Research, our view of the Great Depression of the 1930s is a little
different from that of most people. In our eyes, Franklin Roosevelt
wasnt a hero, he was a villain. Nearly everything he did served
to extend and deepen the economic downturn.
With the exception
of supporting the 21st Amendment for the repeal of Prohibition,
Roosevelts involvement in the economy was an unmitigated disaster.
But in popular memory, that failure is obscured by U.S. success
in WW2, over which Roosevelt presided.
Obama and his minions are taking Roosevelt as a model and are straining
to repeat his mistakes. Because the distortions in todays
economy are far greater than those in the 1920s and 1930s, and since
the public now relies upon government far more than it did in those
days, I dont see any way around a more serious depression
the Greater Depression. Its been going on since 2008,
will get much worse, and has years left to run.
was extraordinarily lucky. His performance looks successful because
when he entered office, both the economy and the stock market were
overdue for a cyclical recovery (nothing goes straight down forever).
He was elected when the depression had already been going on for
four years and the stock market had already fallen 90%. That fortunate
timing was partly a gift from Hoover, whose large-scale interference
in the economy had kept the depression going. (Its odd how
people believe Hoover was the free-marketeer and Roosevelt was the
interventionist. Roosevelt really just continued and extended Hoovers
policies, but with more enthusiasm and far better PR.)
had more good luck (for him) with the arrival of WW2; the victories
in Europe and the Pacific forever idealized every aspect of his
administration. In many ways, the cult of FDR resembles that of
Russias Joseph Stalin, who is still worshipped there as a
seems bright enough, theres little reason to believe hes
a student of history and no reason to believe hes a student
of economics. Its more likely that hes just a student
of power politics, so hes inclined to follow the conventional
wisdom, which is that a combination of Roosevelts bold
action in the New Deal plus World War 2 brought the country
out of the Great Depression. What we hope to show here is that those
notions are nonsense.
How, in fact,
did America recover from the Great Depression? The stock answer
is: World War 2. But a closer look at the data reveals
a different answer.
claims that war production beginning in 1939 ended
our economic troubles. But the American economy didnt truly
recover until two years after the fighting stopped in 1945. In point
of fact, the last depression ran from 1929 to 1947, about 18 years.
And it wasnt
a single terrible decline. As the chart above shows, GDP growth
was falling in 1930, recovered from 1932 to 1936, and then began
a second collapse in 1937, a down-leg due mostly to Roosevelts
Then, in 1939,
industrial production began a tremendous expansion. The unemployed
were put to work either fighting or manufacturing armaments. But
neither activity contributed to the general standard of living.
And even if it had, the growth in production wasnt and couldnt
have been self-sustaining, since it was in fact a growth in the
squandering of resources.
for measuring GDP include government expenditures, so GDP is a poor
measure of underlying economic health. The government might, for
instance, hire 10 million people to dig ditches during the day,
10 million more to fill them in at night, and 5 million bureaucrats
to monitor the work. That would pump up GDP and reduce unemployment,
but it wouldnt increase societys wealth. It would decrease
In any event,
as soon as the governments large wartime expenditures started
dropping in 1945, GDP resumed the shrinking that had begun in 1930.
The GDP growth
of the war years was a prosperity mirage that dissipated when government
spending stopped, unlike the wealth-creating expansion from 1932
to 1936 that had been fueled by private investment. In 1936, GDP
rose $10.5 billion while government spending rose just $2.2 billion.
In 1942, GDP rose $35.2 billion while government spending rose $36.1
billion. The apparent growth during the war was all government spending.
the recovery to collapse in 1936?
was Roosevelts attack on the rich. In 1935, he launched a
barrage of new taxes, including a corporate income tax of 15%, a
dividend tax, higher estate and gift taxes, and additional taxes
on those earning more than $50,000. The top rate on individual income
taxes rose to 79% in 1936, a large jump from 63% just the previous
On top of
this, Roosevelts rhetoric and actions turned increasingly
anti-business. Roosevelt began to strongly support organized labor
which was nice for those who had union cards, but no help
for those who didnt have the connections or skin color to
get one, and great harm for the economy as a whole. His support
got results. In 1935, there were only 3.8 million union members
in the U.S. By 1941, there were about 10 million, approximately
a quarter of the workforce.
The 1936 elections
gave the country de facto one-party rule 76 Democrats
in the Senate and 331 Democrats in the House of Representatives.
Each new piece of legislation berated and punished business
such as the Wagner Act, the ever higher taxing Revenue Acts, and
Undistributed Profits Tax. With the government growing larger while
business lacked strong representation in the halls of power, it
is no wonder that private investment stalled.
Versus Private Investment
expenditure as a percentage of GDP drives the point home even more.
Throughout World War 2, the private market remained in the dumps.
added to the GDP numbers. And there was real progress in areas like
aviation, electronics, and atomic energy albeit at a gigantic
cost. But none of this jump-started the private economy, which focuses
on the products and services people really want.
need a doctorate in economics to understand this chart. The only
major peak during the war marks the end of hostilities and
FDRs death. (Well get to that in a moment). Note that
the 19321936 recovery was far more significant than the often-glorified
FDRs immense spending jolt the private market back to life?
Remember that a wartime economy comes with strings attached; its
not free money. Wartime regulations made operating any business
almost impossible. Nearly everything required government permission.
Taxes skyrocketed, leaving less capital for investment. Further,
forget about competing for resources with the war industry; even
if you had a good business idea, you wouldnt be allowed to
cant prosper when markets are being overruled by command-and-control
rationing. During the war, companies found it easier and more profitable
to produce for government than to produce for consumers. Even companies
such as Eastman Kodak, the film and camera company, began manufacturing
rifle scopes and hand grenades for the military. GM stopped making
cars for civilians and made military vehicles instead. Tires, gasoline,
shoes, beef, sugar, coffee and much else were rationed. The standard
of living in the U.S. during the war collapsed; conditions for consumers
were much worse than in the 30s. Remember that the best definition
of a depression is: A period of time when most peoples standard
of living falls significantly.
private investment, recovery is impossible. Near the end of the
war, as government spending subsided, private investment did return
to the U.S. But that never happened in the USSR, China, or Eastern
Europe, which is why they never did recover. Lack of private investment
is why Britain remained something of a dump right up to the election
of Thatcher. Wartime spending didnt help the recovery, it
war, a majority of businessmen typically over 75%
believed the U.S. would retain the fascist-style economic system
that it had grown into during the 30s and that it seemed to
be cemented into by the war. With that thought so widespread, the
lack of private investment is no surprise.
But with the
closing of WWII, the fear of being locked into a command-and-control
economy began to ease an unintended consequence of FDRs
wiliness. FDR knew that the business world would cooperate in wartime
production only if business leaders were running the show. He slowly
began replacing New Dealers in his administration with the businessmen
who had been squashed by New Deal policies. The new recruits worked
behind the scenes in Washington to undo what the early New Dealers
had accomplished. Necessity had overcome ideology.
On top of
that, the Democrats were losing their grip on Congress. By 1944,
they had only 56 senators and 242 representatives. In 1946, the
Republicans regained both houses of Congress.
And FDR himself
died, which left businessmen feeling a lot safer. The long dark
night of anti-business tirades and crusades had ended. The Dow made
a significant jump, and so did the daily volume on his death.
was still around, but he didnt have Roosevelts dangerous
popularity. As a result, private investment flooded the post-war
market, and a boom followed. Where did the capital to fuel the post-war
boom come from? In a way, it was an accident of wartime policies.
war, the personal savings rate skyrocketed. There were plenty of
reasons for that. For one, quality durable goods exempt from wartime
rationing were difficult to find even if one wanted to buy them.
Second, a big war creates uncertainty. If youre not sure whether
a husband or father will return alive, saving makes sense. The importance
of savings in the 1940s is a reason for pessimism about our prospects
today: unlike during WW2, todays savings rate is still negligible.
And the artificially low interest rates the government has engineered
continue to discourage saving and to encourage consumption, debt,
When the war
ended, the accumulated savings supported both investing and consumer
spending. Its an experience that refutes the Keynesian notion
that consumer spending stimulates the economy and saving suppresses
solve todays problem of overconsumption and debt with more
overconsumption and debt. The conditions that pulled America out
of the Great Depression underscore that point. Once savings rates
increased and made capital available for the economy, private investment
soared, and shortly afterward, so did the rest of the economy.
doesnt repeat, this time it definitely rhymes. The Obama administration
is trying to replay all of Roosevelts moves, and its
making all of FDRs mistakes in spades and more. The Obama
bailouts of public companies are a new twist even FDR didnt
go that far. The U.S. is already in a war economy. Will Obama ramp
up the wars, thinking that whats been done so far isnt
line is that, based on everything we know about the Great Depression,
the Greater Depression, which is still in its early stages, is going
to be nasty indeed.
history is only one of the many ways the editors of The
Casey Report use to glean whats in store for the economy
and to discover the best profit opportunities for smart investors.
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a best-selling author and chairman of Casey
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