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The current stock market crash has
spurred a vital national debate about the causes and catalysts of the Great
Depression. The dominant school of thought believes that the stubborn refusal
of then president Hebert Hoover to intervene after the stock market crash of
1929, and his preference for free market solutions, led directly to the
ensuing decade-long catastrophe. Through this lens, our leaders assure us
that the most recent raft of government measures will prevent another episode
of bread lines, Hoovervilles and pencil salesmen. As
usual they have it completely wrong. In my view, the Depression was created
precisely because Hoover
followed the path that our government is now taking.
When the stock market bubble of the Roaring Twenties (which was created as a
result of the loose monetary policy of the newly created Federal Reserve)
finally popped, Hoover
would not allow market forces to correct the imbalances. His policies were
aimed at propping up unsound businesses, artificially supporting prices, particularly
wages, and providing Federal funds for public works projects. These moves
went well beyond the progressive reforms of Teddy Roosevelt, and established Hoover as the most
interventionist president ever up to that point. In fact, much of what eventually
became the New Deal had its roots in Hoover’s
policies.
However, at the time, there were those who recommended a different course. Andrew
Mellon, the long-serving Secretary of the Treasury whom Hoover
had inherited from the prior two Republican Administrations, was labeled by Hoover
as a “leave it alone isolationist” who wanted to “liquidate
labor, liquidate stocks, liquidate the farmers, and
liquidate real estate.” Hoover
would have none of it. In fact, during his nomination speech for his second
term, Hoover bragged “We determined that
we would not follow the advice of the bitter liquidationists
and see the whole body of debtors of the United States brought to
bankruptcy and the savings of our people brought to destruction.”
Hoover chose to
ignore the sound advice of his Treasury Secretary (in contrast to today where
the current Treasury Secretary Henry Paulson is actually leading the charge
over the cliff) and instead used every tool at his disposal to
“fix” the problem. As a result, rather than allowing a recession
to run its course, with healthy and rapid liquidations of the mal-investments
built up during the boom, Hoover inadvertently created what became the Great
Depression.
When Roosevelt took office he continued the
same failed policies only on a grander scale. The magnitude and the idiocy of
many New Deal programs, such as the wage and price setting National Recovery
Administration (NRA), compounded the problems. So while Mellon’s advice
would have caused a sharp but relatively brief economic downturn (which
occurred after the Panic of 1907, for example), the Depression plodded on for
nearly a decade until the country began gearing up for the Second World War.
In an amazing feat of revisionist history, somehow Hoover’s interventionist policies
have been completely forgotten. It is taken as fundamental that his inaction
led to the Depression and Roosevelt’s
“heroics” got us out. Unfortunately, since we have learned
nothing from history, we are about to repeat the very mistakes that lead to
the most dire economic circumstance of the last century.
A major difference however, is that the structure of the U.S economy today is
far weaker than it was in the fall of 1929. Years of reckless consumer
borrowing and spending, and enormous trade and budget deficits have resulted
in a hollowed out industrial base and an unmanageable mountain of debt owed
to foreign creditors. Instead of the support of a strong currency backed by
gold, the public now must deal with a modern Fed free to print as much money
as politicians want. So rather than getting the benefits of falling consumer
prices (as happened during the Depression), consumers today will contend with
much higher consumer prices, even as the economy contracts.
With Barack Obama now waiting in the wings to conjure a newer New Deal, far
larger than even FDR could have imagined, and at a time when we cannot even
afford the old one, this will not be your grandfather’s Depression. It may be much worse.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
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