Sunday, November 1, 2009

History Lesson From the 'Twenties

Courtesy Barrons


Most of the article blames the government for policy mistakes.  Fair enough, policy mistakes were made.  But at a fundamental level, it was the misguided, misinformed opinion of the politicians - probably in connection with big corporations - that they are more potent than the business cycle and possess the tools to create immediate, ongoing prosperity. 

In many ways, the approach we are taking today reminds me of the same sort of thinking, that QE, bailing out the banks, creating huge amounts of debt will leave us better off.  Somehow, history suggests that this time will not be any different.  My core principle "you cannot fight your way out of a debt crisis by issuing more debt".


EIGHTY YEARS AGO THIS WEEK, THE U.S. economy took its first step into the abyss. Variety magazine headlined it as "Wall Street Lays an Egg." Barron's headlined with "Severe Liquidation on Thursday Stemmed by Banking Support; Subsequent Rally Followed by Orderly Decline at End of Week."
The severe liquidation of Black Thursday, Oct. 24, 1929, continued into the next week. By the issue of Monday, Nov. 4, Barron's was reporting "one of the most cyclonic breaks in the history of Wall Street." From the peak of Sept. 3, when the Dow Jones Industrial Average reached 381.17, the decline totaled 151.1 points on Nov. 4. "In barely seven weeks, the price gains of more than a year were swept away."

In neither Variety nor Barron's was there any apprehension that the Great Depression would follow the stock market.

In November 1929, Hoover took an active role in protecting the economy. He met with industrialists and union leaders and pushed them into a deal: Industry would not cut wages. Unions would not strike. If there wasn't enough work, jobs would be shared rather than prompting layoffs.

Hoover believed high wages were the key to prosperity. For employers, he created policies that allowed firms to cooperate in order to avoid "cut-throat competition" for labor.

On the labor side, Hoover signed the Davis-Bacon Act forcing local governments to pay union wages on public works and the Norris-LaGuardia Act outlawing injunctions against strikes and picketing.

Hoover's policies did what they were supposed to do: By late 1931, real hourly earnings in manufacturing had increased by more than 10% (adjusted for deflation of prices). Yet manufacturing hours worked had declined by more than 40%, even more than total output, which fell about 20%. By the end of 1931, the general unemployment rate was 15.9%, and it would get still worse for two more years.

Ohanian calculates that under Hoover's wage-support program, which trickled down from large businesses to small, the prevailing industrial wage rate was as much as 40% higher than the wages job-seekers would accept. Too many workers chased too few jobs that paid too much, and the result was men lined up around city blocks to apply for jobs.

The Hoover policy was more cooperative and voluntary than the mandates of the New Deal's National Industrial Recovery Act, but they were the same anticompetitive, price-fixing policies.

While generations of Americans have blamed Hoover for relying on the free market instead of government intervention, some of the workers' misery in the Great Depression should be attributed to Hoover's mistaken high-wage policy.

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