-Caveat Lector-
Begin forwarded message:
From: [EMAIL PROTECTED]
Date: August 13, 2007 2:17:40 PM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: (2) A Good Time to Remember Life during the Great Depression
http://vlib.iue.it/carrie/reference/worldhistory/sections/
30depres.html
Upon the conclusion of World War One, the beginning of the so-
called Red Scare and fears of generalized labor violence such as
that of the Molly Maguires a generation earlier, and a sudden burst
of inflation, started the post-war era off somewhat ominously in
the United States. Things were much worse elsewhere. The Allies had
blockaded Germany during the war, and starvation among the civilian
population of Central Powers had been one of the reasons for the
Powers' decision to capitulate. Famine continued in eastern and
central Europe. The Bolsheviks under the leadership of Lenin had
seized control of Russia, but several Royalist insurrections broke
out, and the Allied powers tried to aid the insurgents in
overthrowing the Communist regime. The result was a prolonged and
ghastly civil war. At the close of the First World War and the
struggles that followed, both the victors - except for the United
States and Japan - and the vanquished were exhausted and their
treasuries drained.
Nevertheless, some of the Western nations contrived, by using their
accumulated capital reserves, confiscating the remaining wealth of
the defeated nations, and by continuing the deficit spending that
had financed their war effort, to make the 1920's a period of
extravagance, even if such extravagance was enjoyed only by a small
portion of the world's population. This era of artificial plenty
came to an abrupt end with the collapse of the world's stock
markets -- the Stock Market "Crash" of August 1929 -- and the
resultant disappearance of a significant portion of the world's
"wealth".
In order to understand how this occurred, one should understand the
curious way in which stock markets work. Let us consider an
example. There is a new company that needs $1000 to begin
operations, so it sells one thousand shares of stock for one dollar
each. You pay one dollar and become the proud owner of one share of
stock worth one dollar. You must remember that a share of stock is
worth either what you paid for it or what someone else is willing
to pay you for it. Let us say someone comes up to you and offers
you five dollars for your share of stock and you accept. The worth
of a share of stock is whatever that stock can be sold at, so the
value of all of the shares of stock in that company is now five
dollars. Although only five dollars has changed hands, $4000 of
additional wealth has been created. If you then begin to regret
having sold such fine stock, you might take an extra five dollars
of your own money and buy a share of that stock for ten dollars.
The market value of all thousand shares of stock is now ten dollars
and all stock holders are becoming rich quite rapidly.
As long as everyone is confident and does not wish to lose out in
the general enrichment, this sort of thing is well and good. But
all of this wealth is merely "paper wealth" that has been created
by the transfer of very small sums of real money. Suppose that the
person who now holds the ten dollars that you paid for your share
of stock decides that it would be unwise to buy any further stock.
And further suppose that one of your fellow stock holders decided
to try to sell his share at ten dollars. He would find that there
were no buyers for ten dollars, or five dollars or even one dollar.
Your stock and that of your fellow stock holders would have become
worthless and $10,000 of wealth would have vanished.
This sort of thing happens all of the time on a less dramatic
scale. The person who is willing to buy stock because he believes
that people will soon be willing to buy the stock for even more
than he spent is called a bull and someone who has decided that the
value of stocks will not increase and that he should not buy
anything is called a bear. What happened in 1929 is that some stock
market investors who had been bulls for the previous five or six
years began to worry that the good times might be coming to an end
and turned into bears. Once the prices of stock started falling,
investors sold stock for whatever price they could get, grabbed
what money they could and held onto it. This meant that stock
prices continued to fall. The Stock Market is more than a
financier's guessing game, though. It is one the means by which
companies obtain the money they need.
In 1929, many firms that needed money in order to keep running
found it impossible to borrow any from banks and could not sell
stock in their companies. Without funds or the hope of acquiring
funds, many companies went bankrupt. They were unable to pay back
any money they might have borrowed, and the banks that loaned them
the money, suddenly finding that they owed more money to their
investors than they were likely to receive from their debtors, also
went bankrupt.
The bankrupt companies were forced to lay off their employees at
exactly the same time that their banks took away their savings. So
these workers now had neither a job nor an income nor any savings,
and so they could no longer buy anything. The businesses that
depended on selling to them no longer had a market, and so they
went bankrupt also and more people lost their jobs. The whole
situation was a very vicious circle.
Throughout the world, new leaders arose to replace those
discredited or overthrown as a result of the war, while leaders who
saw an opportunity in the weakening of Europe's resources and will
arose among non-Western peoples. Certainly there were ample signs
among Europeans of dissatisfaction with the way things had been,
and were being, done, and many were willing to embrace radical
changes. Some among the intellectuals turned to eastern religions,
mystical cults, or praise of a life of indolence and self-
gratification. Among the working classes, some turned to Communism,
while others threw themselves into fascist movements of one sort or
another.
Fascism is difficult to define, but it was an important force in
the world between the wars. There were fascist parties in almost
every country, at least every Western country in the world, and the
Second World War was essentially a struggle between the fascist and
non-fascist powers. In a broad sense, Fascism seems as if it were
an extreme form of Romanticism, rebelling against the Realist
doctrines of the Communist nations and the middle class
"democratic" states that were, in spite of the changes wrought by
the War, still only continuations of the conservative regimes of
the Congress of Vienna.
Fascist movements were centered upon charismatic leaders such as
Mussolini in Italy, Adolf Hitler in Germany, Francisco Franco in
Spain, Salazar in Portugal, Tojo in Japan, Peron in Argentina, men
who promised simple solutions to the complex problems of the day.
These solutions usually involved a return to a past glory based
upon social and racial purity, a concentration of power in the
central government, an exaltation of the state above the individual
and an enforced return to some vaguely-defined set of "virtues."
The Fascist leaders usually ascribed their people's sorry condition
to a betrayal by former leaders, and they led popular attacks upon
those who had "conspired" against the state. They viewed war as a
positive good that would weed out the unworthy from the population
and exalt the "meritorious" survivors.
The unstable nature of the fascist states provided a constant
background of uncertainty to the efforts by many countries to
recover from what amounted to economic paralysis. In the end, it
was the fascist powers that would lead the West out of the Great
Depression.
The most important economist of this period was John Maynard Keynes
(rhymes with "rains"). His view of economics was rather simple. The
economy consisted of people passing wealth from one to the other.
If they have too much wealth or pass it back and forth too rapidly,
the economy "heats up." Money and credit become worth less and so
the prices of commodities rise. If there is too little money and
credit or if it moves too slowly from hand to hand, the value of
money and credit increases and the price of commodities fall. The
first situation is called inflation and the second called recession
or depression, depending on how severe the drop in prices is and
how long the situation lasts.. Keynes's view was that it was that
government was responsible for keeping the right amount of money
and credit in circulation and the rate of circulation such that the
economy would neither "heat up" nor "cool off".
The problem was that government could not control this matter
directly. If people chose to keep their money and not buy anything.
government should not force them to do otherwise. Keynes understood
this problem and felt that the government had to use deficit
spending, putting more money into the economy than it took out,
during recessions or depressions. The government could do this by
reducing taxes, but this would not be effective in a situation in
which people were simply hoarding all of the money they could. So,
said Keynes, the government should print more money and so go into
debt. The money should be used, if possible, for public works and
economic infrastructure (such as improved railroads, hydroelectric
dams, flood control projects, bridges, irrigation canals, and the
like) that would increase production in the long run and should get
money into the hands of the consumers so that they would begin to
buy again in the short run.
Those of you who have drawn water by using hand-pump probably
remember that one often has to pour some water into the top of the
pump before it will work effectively. This is called "priming the
pump", and deficit spending by governments in order to start a
flagging economy moving again is called pump-priming. How is one to
pay for pump-priming? Keynes said that the government would get the
money back by raising taxes when the economy was too "hot", and
would be able to retire its pump-priming debt and cool down the
economy at the same time by taking money out of circulation.
Furthermore, he noted, the government would be "buying" capital
improvements when the price of such things was low and would be
paying off its debts with money that had been made "cheap" by
inflation.
This was, and is, an attractive approach to controlling the
national economy, but Keynes had no idea how much deficit spending
would be necessary to start a modern industrial economy working
again. Most nations used variations of Keynes's strategy. Benito
Mussolini, the Fascist dictator of Italy (1922-1945), built new
highways and modernized the nation's railroads. Adolf Hitler, the
dictator of Germany (1932-1945), built a magnificent new highway
system (the Autobahn, which is still in use) and subsidized a new
auto company (Volkswagen) that was to revolutionize Germany as
Henry Ford's Model T had revolutionized the United States. In
America, President Franklin Delano Roosevelt (1931- 1945)
implemented a broad scheme of recovery called The New Deal,
involving social works (such as social security, workman's
compensation, the Writers Project, and the like) and extensive
programs of public works (Hoover Dam; Grand Coulee Dam; the
Tennessee Valley Authority, Lone Star Lake Dam in Douglas County,
Kansas and many other things), all accompanied by federal
regulations to ensure their proper application.
Despite the efforts to "reboot" the economy and the tremendous sums
being spent in this effort, the recovery of the world economy was
agonizingly slow.
Hitler, for one, was not inclined to wait and he felt that
Germany's recovery was being unnecessarily slowed by the lack of
territories that the Allied Powers had taken away from Germany in
the aftermath of the First World War. He began to build an army,
navy, and airforce to regain territories by force if necessary. It
took the other Western nations quite a while before they realized
that Germany's investment in military power was too great to be
justified merely by the return of the "lost" territories it demanded.
When they finally did so, about 1938, they began feverishly
expanding their own military forces. The immense deficit spending
on preparing for and waging war turned out to be the "pump-priming"
needed to end the Great Depression.
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