"People are always shouting they want to create a better future. It's not true. The future is an apathetic void of no interest to anyone. The past is full of life, eager to irritate us, provoke and insult us, tempt us to destroy or repaint it. The only reason people want to be masters of the future is to change the past"
History is written by the winners. The above is taken from Milan Kundera's Book of Laughter and Forgetting and refers to the consistent efforts of Soviet officials in Eastern Europe to rewrite history. Soviet communism is a thing of the past, but the battle to control the future in order to rewrite the past is far from over.
In the midst of a global financial crisis, it is interesting to see how our understanding of the Great Depression, 80 years ago, shapes current attitudes. It is even more interesting to examine the discrepancies between actual facts and the history currently taught at elementary schools and published in mainstream newspapers.
We can summarize the common view of the Great Depression as follows:
1. In the 1920s, the US stock and bonds markets were hot, and "greedy" speculators were making millions.
2. The US had a republican president, Herbert Hoover, who favored small government and limited intervention in economic affairs.
3. In October 1929, the stock market crashed; after that, many people started losing their jobs.
4. President Hoover did not respond properly to the crisis by refusing to increase government spending.
5. Franklin D. Roosevelt took over in 1932. He started the New Deal, a program of massive government spending in order to increase employment and "jump start" the economy.
6. Roosevelt based his policy on John Maynard Keynes' General Theory of Employment, Interest, and Money.
7. Through government investment and the New Deal, Roosevelt managed to get America out of the Great Depression.
8. Then, America went into World War II and emerged from it as a singular economic and military power.
This version of history is propagated in standard schoolbooks and mainstream media outlets to this very day. It is also common among mainstream economist. Two days ago, for example, Paul Krugman, a Princeton Economics Professor and Nobel Prize Laureate, wrote about President Hoover "slashing" government spending in response to the crisis, and the delayed recovery this resulted in.
And now, for the facts:
- In the 1920s the stock and bonds markets were indeed hot and full of speculators. What most accounts of the crisis forget to mention is the source of all the cheap money that flooded American markets during that time. In 1913, the US Federal Reserve was established. Between 1913 and 1918, the Federal Reserve inflated the money stock in the US. It continued to do so during the 1920s. At the same time, most other European powers established their own central banks and took their currencies off the gold standard. This meant that governments now had the power to print as much money as they wish to spend and confiscate public money without the need to raise taxes. As it happens, one year later, in 1914, the civilized world descended into the most brutal war in the history of humanity (until then) - World War I. During the war, the American government increased its spending and intervention in the economy and printed money on an unprecedented scale.
So, the stock market was indeed ripe with speculation in the 1920s, but the source of all the free money and excess capacity can be traced back to government-induced inflation in order to finance war (sounds familiar? We'll get back to this point).
- Herbert Hoover, despite being a republican, started massive government investment programs long before Roosevelt officially launched the New Deal. In fact, between 1929 and 1933, federal expenditures per capita grew by more than 88%, compared to "only" 74% between 1933 and America's entrance into World War II in 1940.
- John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936. As we noted, the New Deal began in 1933, and government expansion began in 1913 and accelerated again from 1929 onwards. Keynes indeed had influence, but the US government started expanding long before he became the chief ideologist.
- The unemployment rate in 1932 was more than 20%. In 1940, after a decade of unprecedented government spending and 7 years of the New Deal, it was still nearly 15%. Unemployment was reduced dramatically only after America went into World War II and the country's human and industrial capacity was enlisted.
So, Government spending indeed ended the Great Depression, but it was spending on war and not on the arbitrary government projects of the New Deal (for a good overview on the causes to the creation and prolongation of the Great Depression, see Murray Rothbard's classic America's Great Depression).
The above facts are well known and documented. They are based on simple information published by the US government. Still, they might come as a surprise to many. As you probably figured out, a proper understanding of the Great Depression is essential to understanding our current crisis.
Just like then, a rapid expansion of the money supply created a decade of rapid growth and exotic investment products. Just like then, the new money was created by government - in cooperation with the big banks - in order to finance wars (Iraq, Afghanistan) and other political giveaways (AIG, General Motors, etc.). Just like then, the chief ideologists were telling us that the solution is more money printing, more government investment, more powers to the Federal Reserve, and increased "regulation" of everything under the sun.
There are also a few differences: back in the 1920s, the US was an industrial superpower - the factory of the world. Its citizens had a high savings rate and its government ran a surplus (see PDF). Today, Americans produce very little, and live on credit to consume much more than they can afford. The US government is also living on borrowed money and it's public debt is ballooning.
It is not surprising that many of those currently in power are still trying to rewrite history. The legitimacy of their power - and their ability to expand their power - depends on it. Back then, the only way out of the financial crisis was a great war. Will we be smarter this time? So far, it does not look like it.
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