I have a coworker who I regularly debate with on a range of topics. Today we were naturally talking about the market, the fed injecting money into it and the administration trying to give money to families to increase their purchasing power. This evening he sent me a text to This article from fee.org told me he just read it, and asked that I do also, which I have just finished. I saw that fee.org is libertarian and right center in their views.
In the article, they blamed the great depression and the length of it on four factors listed below.
My questions are these:
John Kenneth Galbraith's highly readable, fact-filled, and authoritative bestseller The Crash of 1929 does not bear out this tendentious interpretation. [Unattributed quotes are from this source].
The 'Government's easy money policies' were a lack of policy and regulation. It was exactly a libertarian dream. The Federal Reserve was the weakest of institutions. Formed after one of the many previous crashes, it emerged 'from the panic of 1907, with its alarming epidemic of bank failures: the country was fed up once and for all with the anarchy of unstable private banking' [Paul A Samuelson, Economics, 1970] . Its board, who had other jobs and little to do as board members, didn't act even well into the crisis. Exactly as libertarians would desire.
Galbraith's thesis centres on human psychology: 'Americans... were displaying an inordinate desire to get rich quickly with the minimum of physical effort'. He notes the Florida real estate boom of the mid-decade, which, incidentally, gave us the the term 'Ponzi scheme' after one of its promoters. 'The Florida boom was the first indication of the mood of the twenties. That the mood survived the Florida collapse is still more remarkable'.
Gabraith notes the half-truth in the first point: That in 1927, with the US stock market already running since 1924 with little pause, European central bankers came to the US to successfully urge for a lowering of the interest rate. This made funds available that flowed into stocks either directly, or more seriously, by underpinning lending to others who invested. The above argument rests on attributing to this move the blame for the Depression.
'This view that the action of the Federal Reserve authorities in 1927 was responsible for the speculation and collapse has never been [in 1954] seriously shaken. There are reasons why it is attractive. It is simple, and it exhonorates both the American people and their economic system from any serious blame [my italics].
'Yet the explanation obviously assumes that people will always speculate if only they can get the money to finance it. Nothing could be further from the truth. There were times before and there have been long periods since when credit was plentiful and cheap- far cheaper than in 1927-29- and when speculation was negligible. Nor... was speculation out of control after 1927, except that it was beyond the reach of men who did not want in the least to control it. The explanation is a tribute only to a recurrent preference , in economic matters, for formidable nonsense'. Galbraith goes on to detail, often humorously, the growing stake those who should have been cooling the market had in inflating it.
Hoover did not have interventionist policies after the crash. On the contrary, he adopted the orthodox free market idea of a self-correcting system. Indeed, he denied the very existence of the Depression: 'In June of 1930, Herbert Hoover was visited by a delegation of public-spirited men who urged an expansion of public works to ease the plight of the unemployed, who were then rising into the millions. "Gentlemen"the President said, "You have come sixty days too late. The Depression is over"'. [JK Galbraith, Money, 1975]. 'The modest tax cut apart, hoover was clearly averse to any large-scale government action to counter the developing depression'.
The Securities Act of 1933 and the Securities Exchange Act of 1934 merely curbed the worst excesses of speculation and margin trading that, by then, were known to have contributed to the crash.
Argument number 3 depends on the proof of the previous arguments, which are erroneous.
The Wagner Act allowed labour to organise. The libertarian case assumes that if labour costs have no floor, then in a falling market eventually people will become cheap enough to be employed. The Depression itself was shocking because classical economic theories like this, long-held to be self-evident truths, were revealed to be failing to reveal themselves. People could be desperately poor and remain unemployed, as there was no demand for products, because people were not paid enough to create demand. Hence, Keynesianism.
These acts ensured the prosperity attending the Second World War was not directed largely into the hands of corporations, but emerged into the hands of working people, generating a burgeoning middle class and underpinning the prosperity of the 50s and 60s. The Wagner Act was passed in 1935: I feel the United States would not have been able to fulfil its role as the Arsenal of the Allies a few years later had ' the last remaining bulwarks of productivity' been dragged 'to their knees'. In this period the US economy ramped up efficient production much, much faster than it had in the previous war when laizzez faire applied, the the role of Roosevelt is readily obvious in this.
It must be noted that there were endless warnings from classic economists from the mid 1930s onward that government intervention was inimical to growth. Sadly for them, these voices were constantly proven wrong by events. As is the basic contention of your friend's source: it is completely at odds with events as they played out.
Oof. Your coworker is not correct. I think the other commenters have hit on a number of domestic reasons that Great Depression was so long, but I want to tackle two topics in particular.
First, let's talk about government stimulus in macroeconomics 101 terms. The total economic output of a nation is composed of consumption, investment, government spending, and net exports (exports minus imports)--shorthanded as Y = CIGN(X). It's not terribly important here, but investment means something different in this case than our colloquial understanding of the term.
So, during a recession, demand often craters, and with it consumption. During the Great Depression, this was enhanced by a deflationary spiral. When inflation is negative, it means your money is worth more tomorrow than it is today, so there's an incentive to put off purchases into the future, which further reduces consumption, etc., etc.
As you can see by the formula, cratering consumption means less total output, unless some other variable increases to make up for it. If people aren't buying things, business aren't going to invest in their productive capacity, so that's not going up. Sometimes you can boost N(X) by devaluing your currency, making your exports cheaper on the global markets, but for reasons we'll get into later that wasn't really possible in the Great Depression. That pretty much leaves the gov't as the sole stimulative potential in the economy. So if the gov't boosts up G (gov't spending, in broad terms) through fiscal stimulus, it can make the recession/depression not as bad. In other words, your coworkers point #3 is flat wrong--FDR's intervention in the economy was squarely in line with our modern understanding of economics. That would be true even if FDR's projects had been simply paying workers to dig holes and fill them in again, but he also made investments in American infrastructures (through electrification, etc.) that would pay major dividends in the future.
This is often shorthanded as the paradox of thrift. When the economy is humming along, the government should apply the brakes (often through higher interest rates) but when the economy dips the government should spend spend spend! For a more modern example, look at the recovery from the Great Recession. The Chinese used a full suite of tools--they kept the Yuan artificially low (aiding exports), and used both monetary and fiscal stimulus. They had a (relatively) easy ride of it. After an initial fiscal stimulus, the US only did monetary stimulus (the GOP in Congress was not in favor of boosting the economy fiscally, for both ideological and political reasons), and had a bumpier ride of it. The Eurozone did neither--the European Central Bank refused to act as a Lender of Last Resort--and the ECB actually promoted contractionary policy in 2010. They had the bumpiest ride as a result. (These pants-on-head policies were driven in part by a belief among Germans [the largest Euro economy and home of the ECB] that Weimar inflation brought Hitler to power. This belief is inaccurate, but it's worth noting that what helped Hitler consolidate power was his massive stimulative efforts, which helped the Reich recover faster than other economies and enhanced his legitimacy.)
The Great Depression was not an experience isolated to the United States, either. The major success of the Great Recession was that we did not engage in "beggar thy neighbor" trade policies. Not so in the Great Depression, where numerous governments imposed tariffs and quotas on foreign goods, the net effect of which was to bring international trade to a screeching halt and intensify the effects of the Great Depression. Whatever domestic contraction happened was intensified by the fact that international trade ground to a halt and so exports cratered as well.
Nothing that happened during the Hoover administration could possibly have "caused" the Great Depression. Like every other asset price bubble, the seeds of the depression were sown years before it began. The 1920s saw an unprecedented global mobilization of capital due to the development and mass marketing of new investment schemes and financial instruments. This led to more capital being available, and the standards of investment declining - in other words, if in the 1910s a bank would only capitalize a project expecting a 5% return, in the 1920s, a Wall Street Fund manager might be willing to capitalize a project with a 3% expected return, then a 2% one, then a 1% one. By 1928, this had led to trillions of dollars in today's money going towards zero or close to zero return investments. The Great Depression, like any crash caused by an asset bubble, was in reality a Great Correction. Trillions of modern dollars worth of capital had already been "destroyed" through investment in dying and declining industries, which managed to raise money by simple virtue of so much capital being available.There have been asset price bubbles caused by easy money policies, including the Japanese Asset price bubble, the many crashes of the Turkish economy during the Cold War, and the Asian Financial Crisis, but the Great Depression was not one of them. The monetary policies of all Great Powers in the 1920s would be considered extremely "tight" by today's standards. All the Great Powers used the Gold Standard, meaning they could not freely create money to begin with and inflation for decades had been zero or close to zero. There had been a few instances of expansionary monetary policy, such as Japan in 1877-78s and the Confederate States of America, but they were motivated by wartime finances, not economic recovery. It would not be extreme to say that the idea of expansionary monetary policy as an economic and not fiscal strategy had not been invented yet. Indeed, the first governments to embark on expansionary monetary policy for stimulus purposes were largely "flying blind" with no popular theory to back them up.
As we can see from the above, the government had no hand in the 1920s credit boom - the market, through the development of investment instruments and techniques to sell them - created that itself. The market did not self-adjust, it self-destructed. This helps answer fee.org's second point - there is never, will never, and has never been a self-adjusting mechanism in the market to the same extent that Classical economists suggested. The prevailing theory at the time the depression hit was that private businesses run rationally should respond to any decline in demand by downsizing, lowering prices, and lowering wages. The problem is that prices of inputs, outputs, and wages are "sticky" - there are costs associated with changing them. The reasons for this are manifold:
Prices and wages are also both affected by psychological biases. Namely:
In economics as in war, retreats often turn into routs. While President Hoover did engage in some interventionist policies, he was a believer in the free market and Classical economics. His speeches are full of confidence that the predictions of the classical economists would come true - that the market would adjust itself, and that the economy "had turned the corner". Problematically, those oversimplified theories were wrong for reasons that were not clear at the time.
The third point is wrong on two counts. First, FDR only expanded interventionist policies on paper - his budget was actually more balanced than Hoover's. Second, interventionist policies led to economic recovery in other countries. Japan was far more extreme in its intervention than the United States. Finance Minister Takahashi Korekiyo responded quickly to the crisis, abolishing the gold standard, slashing interest rates, funding military and civil projects, and running a deficit both through borrowing and printed money. While the economies of the United States was producing at 75% of 1929 levels in 1935, Japan was producing at 141.8%. Germany, which spent heavily into debt following Hitler's rise to power in 1932, expanded its production from 53.5% of 1929 levels to 94.0% within three years.
The fourth point just has no evidence to substantiate it. "The last remaining healthy sectors" implies that there were very few profitable companies in the Depression, but nothing could be further than the truth. The number of banks in the United States was not even halved during the recession - it declined by only 40%. In other words, even the majority of banks, suffering runs on deposits and a wave of defaulting borrowers, managed to stay in business. Some sectors, such as oil, defense, radio, paper, and hydropower, were in general doing quite well and were never "brought to their knees", before or after the Wagner Act. Case in point, between 1932 and 1954, the stock of the Container Corporation of America appreciated by 37,200%, in spite of the harsh labor laws during the depression and after World War 2.
The case of the Container Corp. of America reveals a bigger truth about recession and depression - the pain is never universal. Some companies - those that borrowed for low-return projects in the credit boom - fared poorly. Others did well. Put simply, asset price bubbles are the result of a lot of people investing a lot of money in a lot of companies with tight margins, and a lot of those companies failing at the same time due to a sudden shock. Bubbles can be the fault of the government, but this one was not.
Sources:
Sjostrom, William. Job Security in an Efficiency Wage Model, Journal of Macroeconomics.
Crompton, John and Ji Young. Experiments Testing the Effectiveness of Purposeful Anchoring on Reference Price in the Context of Public Leisure Services.
Hiromi, Arisawa. Economic history of the Showa era.
Bokhari, Sheharyar, and David Geltner. Loss Aversion and Anchoring in Commercial Real Estate Pricing: Empirical Evidence and Price Index Implications.
Fisher, Irving. The Debt-Deflation Theory of Great Depressions.
Parker, Randall. Reflections on the Great Depression.
While you've gotten some interesting answers on this thread that hopefully should allow you and your coworker to learn a bit more about the topic, understand this: each of the answers you're asking for has been debated for 80 years and are still debated today in quite literally tens of thousands of PhD theses, partially form the basis of several different economic schools, and without an appropriate theoretical background in macroeconomics you're not going to be able to either effectively understand both the criticisms it raises or form an appropriate response to it. A lot of fields within history are fairly straightforward, but arguing how historical precedents apply to economic theory isn't, and on top of that in some ways you're asking an extremely broad question.
So rather than try to cram a semester long intro to macroeconomics course into a post, I want to do something different and provide three books to look at. Hopefully they can provide some context and coherent explanations for the questions raised in the article.
"The government’s “easy money” policies caused an artificial economic boom and a subsequent crash."
Besides a definitional problem of what qualifies as 'easy money' - Tier I capital requirements for banks (in fairness, Basel didn't start until 1974 so I'm using that as short hand for the predecessors)? Margin limits on the market? Central Bank policies? Decisions about the gold standard? - which government(s) are they talking about? I mean, we know exactly which banks started the meltdown of the financial system (Austria) and why (terrible lending and forcing healthy banks to absorb the portfolios of those that blew up), but that doesn't really give enough detail about the monetary policy that enabled the whole mess.
For that, however, I do have a great reference, which is the award winning Lords of Finance by Liaquat Ahamed which covers the central bankers of the 1920s and their disastrous mistakes - some of which were forced by the Gold Standard, which he explains more coherently than in any other source I've read - and how the combination of those mistakes led to the Great Depression.
President Herbert Hoover’s interventionist policies after the crash suppressed the self-adjusting aspect of the market, thus preventing recovery and prolonging the recession.
Again, definitional. 'Interventionist policies'? Hoover blocked almost every Federal relief program (he believed that was the role of private charities), the Fed was beyond ineffective at that point given the way the charter was written, and if 'self-adjusting' refers to either industrial capacity or bank balance sheets it's not exactly clear how either was 'suppressed' - I mean, something like a third of the state of Mississippi went up for auction in a single day in 1933, which tells you all you need to know about just how 'interventionist' things were.
But if you want to learn more about Hoover's responses, the collapse of the banking system in 1931 and 1932, and the complete ineffectiveness of the Fed, then Herbert Hoover in the White House by Charles Rappleye is one of the tiny handful of books that thoroughly explores his Presidential administration (easily the worst of the 20th century) rather than putting it in the context of the (extraordinary) life that he led before becoming one of the most infamous leaders in American history. One of the most interesting sidenotes of the book is the revelation that Hoover was nearly as paranoid as Nixon about his political enemies and authorized a politically motivated break-in that was in many ways worse than Watergate.
For #3 and #4, the debate over the New Deal remains robust today, but the best easily digestible source for an overview of the economic context facing the incoming administration is FDR by Jean Edward Smith. It's bite sized - something like 70 pages or so in the context of a full biography - but surprisingly thorough as an introduction. While he's a strong admirer of FDR, he also walks a fairly middle ground in addressing how untested the policies adopted were - and just how desperate the situation was that required them despite nobody really knowing if they'd work (and many of them didn't).