2011-08-09

Similarities Between the Great Depression and Today

This is frequently bumped to the top as events unfold. The bulk of it was written and first posted on March 23, 2009.

Similarities between the Great Depression and current events. Historical information from America’s Great Depression, Fifth Edition, by Murray Rothbard. (If you haven't read it, I highly recommend it.) Many of the similarities below were selected because Rothbard identified them as causing/prolonging the Depression. In some cases, the correlation is not one-to-one, but I felt the similarities were worth noting. There are more economic similarities, such as the decline in exports, imports and manufacturing, but I focused on the political responses from government and the Federal Reserve.

—Federal Reserve inflated the money supply in the years leading up to the 1929 crash.
—Federal Reserve inflated the money supply in the years leading up to the 2008 crash.

—The U.S., the world’s largest exporter, inflated its currency to aid Great Britain’s economy.
—China, one of the world’s largest exporters, inflated its currency (through the currency peg) and aided the U.S. economy.

—European importers could not export to the U.S. due to tariffs. Instead they financed their imports with loans from America.
—American importers could not export to China due to, among several factors, tariffs. Instead they financed their imports through loans from China (via the Treasury market).

—Under President Harding, Secretary of Commerce Hoover pushed for State Department oversight of foreign loans. Although voluntary and ad hoc, the public came to believe that all of these loans had the State Departments approval.
—Fannie Mae and Freddie Mac entered the subprime market in the early 2000s and subprime lending quickly exploded, while purchasers of Fannie & Freddie debt assumed the loans had Federal approval.

—Throughout the 1920s, the U.S. government aided the agricultural sector.
—Throughout the 2000s, the U.S. government aided the housing sector.

—In October 1929, Boden-Kredit-Anstalt was about to fail, but it merged with Oesterreichische-Kredit-Anstalt, financed with loans from J.P. Morgan and the Federal Reserve.
—In January 2008, Countrywide was about to fail, but it merged with Bank of America, financed by the Federal Reserve.
—In March 2008, Bear Stearns was about to fail, but it merged with J.P. Morgan, financed by the Federal Reserve.
—In September 2008, Washington Mutual failed and was merged with J.P. Morgan, financed by the Federal Reserve.
—In October 2008, Wachovia failed and was merged with Wells Fargo, financed by the Federal Reserve.

—After the crash, President Hoover rejected the calls to allow markets to clear and failed businesses to liquidate.
—After the crash, President Bush/Obama rejected the calls to allow markets to clear and failed businesses to liquidate. AIG, GM, Chrysler are among the most prominent examples.

—After the 1929 crash, the Federal Reserve cut interest rates from 6% to 4.5% and inflated the money supply by 10%.
—After the initial 2008 crash, the Federal Reserve cut interest rates from 2% to 0% and inflated the money supply by 81%.


—One year after the crash, the Federal Reserve cut interest rates from 4.5% to 2% and inflated the money supply, but the actions of banks and borrowers reduced the total supply of money and credit.
—After the crash of 2008, the Federal Reserve cut interest rates to 0% and inflated the money supply, but the actions of banks and borrowers reduced the total supply of money and credit.

—In 1930, unions and the “Progressive Block” pushed for the Smoot-Hawley Tariff.
—In 2009, unions and the “Progressive Block” pushed for a “Buy American” clause in the stimulus bill.

—In 1930, Hoover effectively banned immigration through a State Department press release.
—In 2009, illegal immigrants are returning home due to the bad economy, and the crackdown begun under Bush continues under Obama. Congress also has its immigration opponents, “[Senator] Grassley (R-IA) is urging Microsoft to furlough those temporary foreign workers first before handing out pink slips to Americans and permanent U.S. residents.”


—Hoover pushed for public works and a tax cut, both passed.
—Obama pushed for public works and a tax cut, both passed.

—In 1931, Oesterreichische-Kredit-Anstalt (see above) failed, forcing Austria off the gold standard.
—In 2009…"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna.
-In 2009, Dubai???
In 2010, Greece and other indebted nations threaten the euro system.
—Austria back on the front burner as Hungary says default is possible.

—In summer 2011, Europe is in the midst of a banking crisis.

—In 1931, the money supply declined even as the Federal Reserve desperately tried to inflate.
—In 2008/9, the money supply declined even as the Federal Reserve desperately tried to inflate.

—GDP fell 16.2% in 1931 and government spending increased 30.7% relative to GDP. Federal spending rose 42%.
—GDP grew 3% in 2010 (changed from 2009 on 8/28/09), but government spending increased 7%. However, when one adjusts for government borrowing, the real private GDP contracted.
Federal spending is up 23% since the FY 2009 budget (pre-crisis) , not including off budget spending on bailouts.

—Throughout the depression, Hoover uses moral suasion to pressure industry into maintaining high wages. Congress passed Bacon-Davis Act, mandating “prevailing wages”.
—On February 6, 2009, “Obama issued an executive order Friday requiring federal agencies to consider putting in place agreements that set wages, work rules and other benefits when awarding major construction contracts.

—Hoover created the National Credit Corporation in 1931 to lend to banks, who were then expected to lend to business.
—Bush/Paulson/Bernanke/Obama/Geithner created TARP in 2008/9 to lend to banks, who were then expected to lend to business.

—In 1931, State and Federal governments collude to increase oil prices through restrictions on production and imports.
—In 2008/9, State and Federal governments’ efforts to fight global warming and attack foreign oil will have the effect of increasing energy prices.
Update: Climate Change bill passes House, massive cost increases on every American household, estimates range from about $850 to $1500 and higher.

—In 1932, Hoover accomplished nine goals.
1.Creation of RFC (originally NCC)
2.Creation of Home Loan Bank
3.Aid to Federal Land Banks
4.Public Works
5.Aid to the States
6.Restrictions on natural resource production
7.Increase Federal Reserve powers
8.Reduce immigration
9.Bankruptcy reform

—In 2008/9, Bush/Obama accomplished, are implementing, or plan the following:
1.Creation of TARP
2.Mortgage relief
3.Aid to banks
4.Public Works
5.Aid to States
6.Restrictions on natural resource production (carbon taxes)
—Deepwater Horizon disaster has led to ban on new drilling in the Gulf of Mexico
7.Increase Federal Reserve powers
8.Reduce immigration
9.Bankruptcy reform

—In 1931, Hoover asked for, and in 1932, received, tax increases on income (then only paid by the rich), estates (the rich) and sales, to close a huge budget deficit. Despite the tax increases, federal receipts dropped 10% in 1932.
—In 2009, there are plans to increase taxes in the states, and we may yet see Federal tax hikes on the rich in 2010.
—In 2010, discussion of a VAT tax has increased.
—In 2011, following the debt ceiling battle, the Bush tax cuts for the wealthy may expire.

—Overall, from 1929 through 1932, government’s share of the economy increased sharply. Rothbard’s “private GDP”, which excludes government enterprises, shows government grew from 14.3% of the economy to 24.8% in 1932, a 73 percent increase.
Obama's 2009 budget spends 28% of GDP.
—Private GDP remains depressed and shows little sign of recovery.

—In 1932, Virgil Jordan, economist for Business Week, supporting the public works said, “Just as we saved our way into depression, we must squander our way out of it.”
—In 2009, supporting pubic works, Jon Meacham and Evan Thomas writing in Newsweek, “In the short run, since neither consumers nor business is likely to do it, the government will have to stimulate the economy.”

—In 1932, Hoover bullied the NYSE into effectively banning short-selling.
—In 2008, politicians pressured SEC Chairman Cox into banning the short-selling of financial stocks.
—In 2011, in the midst of a banking and sovereign debt crisis, Greece banned short selling for two months.

—In 1932, until Congress forced the RFC to publicize its activities, its loans were made in secret.
—In 2008/9, Bloomberg sued the Federal Reserve to learn who it lent to, but the information is still secret. Update: Bloomberg won its lawsuit, but the info is still not public. (08/28/09)

—In 1932, RFC money, intended for banks, eventually went to the states.
—In 2009, states asked for TARP money.

—In 1932, the first Glass-Steagall Act allowed the Federal Reserve to use government bonds as collateral, in addition to commercial paper.
—In 2008, Federal Reserve Chairman Bernanke mentioned the possibility of the Federal Reserve issuing its own debt.

—In 1932, Federal Reserve monetary reserves grew 36%, but deflation reigned.
—In 2008/9, monetary reserves grew more than 80%, but deflation reigned.

—In 1932, Federal Reserve inflation of reserves was ended by foreigners and citizens who drew cash and gold out of the banking system.
—In 2010/11 (assuming we are roughly in 1930), will foreigners and citizens finally give up on the U.S. dollar?
—In 2011, U.S. Treasury debt was downgraded by S&P Ratings, though there was no immediate impact on the dollar.

—In 1932, bankruptcy reform weakened the rights of creditors.
—In 2009, bankruptcy reform will weaken the rights of creditors (though many argue they were strengthened too much in 2005).

—Politicians and economists expected a recovery in 1931.
—Politicians and economists expect a recovery in late 2009-early 2010.
—Politicians and economists expect a recovery in 2011, but fears of a "double-dip" are now widespread.

Originally posted on March 23, 2009. Periodically bumped and/or updated.
April 12, 2009 Update: Economic indicators show the beginning of this contraction surpass the Great Depression. A Tale of Two Depressions.
June 28, 2009 Update:Tale of Two Depressions has been updated. Also, climate change legislation added above.
August 28, 2009 Update:Some changes updated due to new data and Bloomberg suit.
November 26, 2009 Update: Dubai sovereign default could potentially set off the next deflationary wave.
May 4, 2010 Update: Greece is going down.

June 4, 2010 Update: Hungary says default is possible and now the focus turns back to the Austrian banks. Also BP has brouhgt about natural resource restrictions.
August 9, 2011 Update: Private GDP and other areas updated.

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