And What Will Happen Today?
Andreas Ramos, Palo Alto, March 2020
When the Wall Street stock market crashed in 1929, it took several years to reach the bottom. In 1932, unemployment reached 25%. It took eleven years (1943) for the US economy to recover.
A new virus appeared in January 2020 and spread worldwide within weeks. In March 2020, the US stock market crashed 24% and unemployment rose to 20% within weeks.
What is happening now? Why is it happening? What’s going to happen?
To understand those questions, we can look back at the Great Depression. Why did the Great Depression happen? What happened during the Great Depression? What did business and government do?
Ten years ago, during the 2008 bank crash (the Great Recession), I looked into the history of the Great Depression to learn about it then. Here are my notes with an update for 2020.
Before the Great Depression
From 1870 to 1920 was the high period of Western colonization, where the colonial powers (the UK, France, US, etc.) looted the colonies (pretty much the rest of the world) which meant The Belle Epoch was a glorious time for the wealthy. There were no taxes on imports, no passports, no tariffs, no regulation on global trade, money, or travel. There was no regulation at all for banks or stock markets.
However, starting in the early 1920s, the US began to fear non-white immigrants so immigration was restricted. American manufacturers wanted to block imports so they could charge more, so they also pushed for tariffs (import taxes). In 1928, the US stopped lending money to other countries, which pushed Germany, Poland, Argentina, Australia, and other countries into recession.
Protectionism was good for the US… for a while. US companies, protected from foreign imports, produced more, so there were jobs. Credit was easy and many over-borrowed.
The stock market was unregulated, so groups of investors put money together in large amounts which allowed them to buy or sell stocks which caused prices to go up and down and they made vast fortunes in the stock market. And for many years, it worked: so many became rich that people began to think everyone would become rich.
The Roaring 20s was a fabulous time of well-paying jobs, new cars, suburban homes, shopping centers, night clubs, negro jazz music, risqué Hollywood movies, cocktails, poodles, divorces, novels, dance halls, evolution theory, overeating, nude art, boxing, Hollywood glamor, ball games, dog racing, and modernist art in the great metropolitan cities of New York City, Chicago, Los Angeles, Paris, and Berlin.
Capitalism itself had changed. In the 1800s, factories were built and managed by families for lifetime with the intention to pass them down to the next generation. However, Wall Street speculators realized they could make money by betting on the up-and-down swing of stock prices. What the company made was irrelevant: soy beans, cargo ships, silk stockings, it didn’t matter. People bought and sold shares daily on the swings of the market. Capitalism changed from long-term investment to financialization. We still live in this system today.
This change created problems. The US government and ideological system was based on the industrial world of the 1800s but everything changed in the beginning of the 1900s. US president Herbert Hoover, a Republican, kept applying policies from the 1800s to the problems of the 1900s which limited his actions and worsened the economic crisis.
In 90 days in late 1929, a third of the stock market evaporated. Consumer spending fell 20%. Investors who had borrowed money to play the market suddenly lost everything and were broke. (To compare, from February 12 to March 24, 2020, the stock market has fallen 37%. So far.)
For people in the 1920s, the recent 1917 Russian Revolution was in their minds. The Communists overthrew the Russian Czar, abolished the aristocracy, nationalized all property, and created the USSR. President Hoover’s response to the Stock Crash was large loans to banks but he felt that to give aid to workers and families was socialist. Republicans felt the churches, the Red Cross, and other charities should help Americans.
At the time, capitalists, factory owners, and bankers saw the role of government as something to support them to make more money or stay out of the way. When the economy crashed, they used government money to help themselves to recover. Capitalists had no interest in workers and families, which made the Great Depression worse because if unemployed workers couldn’t buy, the economy would stop.
The same is happening today. The CEOs, bankers, and Wall Street are willing to give every person $1,200 per month but their motivation isn’t to help people. They are giving government money to people so people can give that government money to the companies.
The 1929 Crash didn’t happen only in the US. It happened worldwide.
The Lives of People during the Great Depression
A quarter of the US was unable to pay for shelter or food. 25% of the workforce lost their jobs. Of the ones who had jobs, half were put on part-time work with 40% pay cuts. 20% of American children were hungry. Factories employed only white men. Women were fired or not given work.
Modern farm equipment allowed farmers to grow more with fewer workers. Farmers also borrowed money to buy the equipment. When people couldn't buy food, farm prices collapsed, farmers couldn’t pay the bank, and they lost their equipment and family farms. On top of that, the Dust Bowl started in 1931. No rain meant no crops. Entire regions of the US were abandoned (as described in John Steinbeck’s The Grapes of Wrath). Hundreds of thousands of men and families wandered, looking for food and work. Many states and towns set up armed roadblocks to keep them out.
Today, farms get little attention because most farms are run by Ag-Biz (agriculture business) which means corporations own and manage gigantic farms. But in the 1800s and into the early 1900s, many Americans grew up on farms and most states were rural farmland.
Help was offered in the form of charity, which was difficult for Americans to accept after a century of a spirit of self-reliance and fear of falling to a lower class.
In many areas, the US ceased to exist as a governing entity. Many states, cities, and towns printed their own money. Companies printed their own money. Even people issued their own money (see examples of “depression era script”). Seattle turned into a soviet, which meant the workers took over and ran the city. San Francisco also nearly turned into a soviet which led to brutal police violence against workers.
Today, we have FDIC (bank deposit insurance), which guarantees that if a bank collapses, we won’t lose our money. Before 1920, there was no such guarantee so when banks collapsed, everyone lost their money. This meant when one bank shut down, everyone ran to their banks to withdraw their money, which meant those banks also collapsed. The entire US banking system pretty much shut down.
Isolationism, nativism, and hatred of foreigners grew rapidly. Father Coughlin, a Catholic priest, spoke weekly on nationwide radio to 30 million listeners (there were only 105 million people in the US at the time) where he attacked Jews and communists. Italians, Polish, Irish, and many other groups also came under suspicion. Between 400,000 to two million Latinos were rounded up and expelled from the US. Over sixty percent were US-born American citizens.
All of these scenes of poverty and desperation were quickly known around the US and Europe. There was social media of a sort at the time. Radio broadcasts with music and news were very popular. People also went to the movies three times a week, where they saw two movies per evening. Before movies started, there were newsreels, which were short news reports. They could see others were also suffering. (Tens of thousands of newsreels can be seen on Youtube.)
The racist attacks were not only against non-whites. The US army veterans of World War One had been promised a bonus for their military service but the US Congress never paid it. In hunger, they began asking for their bonus. The government had given two billion dollars (twenty-five billion today) to banks and railroads but nothing to the veterans. US veterans gathered peacefully in Washington DC to demonstrate, set up a tent city in the Washington Mall, and called themselves the Bonus Army. The government brought in the US Army, led by General MacArthur, who used bayonets, sabers, tear gas, and tanks to drive them away. The newsreels showed poverty-stricken veterans being chased away by tanks. Watch the US Army chase away veterans in newsreels from 1932.
Franklin D. Roosevelt
Franklin D. Roosevelt (FDR) came to office in March 1933. The US economy was in shatters. Banks, farms, factories, and business had shut down.
FDR introduced the New Deal. It was not a single program nor did it have a clear idea. Instead, FDR tried lots of experiments and poured billions into the economy. Some programs worked, some didn’t, and programs evolved as time went by. The economy began to grow again at 8-to-10 percent per year.
One of his first steps was to close all US banks. In a matter of days, he reorganized them, consolidated them, refunded them, and reopened the banks.
The New Deal created public works, subsidized farm produce, created new mortgage markets, shorten the work week and work hours per day, regulated securities, created deposit insurance, and the Federal Reserve, reforesting, repealed Prohibition, added social insurance for the elderly, unemployment insurance, and disability insurance, set up watershed management, added government support for unions.
(For non-Americans: The “New Deal” is a metaphor. In a card game such as poker, the dealer hands out poker cards. Some players win and some lose. The game is over and the dealer offers a new deal, a new set of cards. The idea was that the game was over and FDR would offer a new chance.)
Millions of young men were offered jobs in the quasi-military Civilian Conservation Corp (CCC). The Civil Works Administration (CWA) and Works Progress Administration (WPA) also hired people. These projects were used to build infrastructure (buildings, roads, bridges, dams), pay workers, feed families, and keep people from joining the Communist Party. These jobs however didn’t reach everyone: there were severe quotas against Blacks and foreigners.
The racism in the New Deal shaped US cities today. To restore home purchase, mortgage payments, and new home loans, the New Deal created the Federal Housing Administration (FHA) in 1934 which guaranteed mortgage loans. To do that, they mapped cities to identify neighborhoods as green, blue, yellow, and red. The criteria was race: neighborhoods with too many Negros, Jews, Italians, or Orientals were marked red and loans were denied. If you look at your city’s maps today, your neighborhoods were created with these maps. (see more about redlining and examples or search for "redline maps”.)
Farm prices continued to be low, so the Agricultural Adjustment Administration (AAA) was created to organize farm production, encourage new crops, destroy surplus crops, and subsidize farm prices. This was an American form of Soviet collectivization.
The same model was used for industry. The National Recovery Administration (NRA) organized factories, reallocated resources, shut down surplus production, and guaranteed prices.
The US had already tried collectivization in 1917 for WWI. The War Industries Board (WIB) introduced mass-production to increase efficiency, standardize products, control prices, set production quotas and allocate raw materials. The War Boards were established again in WWII to create and manage the massive industrial production. Many today insist government can’t manage industry, but indeed it did in WWII and it was very effective.
Bosses used threats, infiltration, intimidation, layoffs, murder, and assassination to against workers and unions, which led to armed conflict in many parts of the US. In 1921 in West Virginia, ten thousand coal miners and their women fought against mine owners and the US Army at the Battle of Blair Mountain, the second-largest insurrection in US history. The US military used airplanes to bomb the strikers.
The National Labor Relations Board (NLRB) stopped the conflict between bosses and workers by giving the unions a guarantee the workers wouldn’t be fired and the factories a guarantee the unions wouldn’t strike. The unions won rights to minimum wage, overtime, the five-day workweek, weekends, annual vacations, and to organize unions. If you enjoy any of these benefits today, that’s where these came from.
The US also created vast new industries. The Tennessee Valley Authority (TVA) build dams and brought electricity to the rural South US, a region of backward poverty. The Rural Electrification Administration (REA) built electrical power collectives across the US. No US company had the resources or ability to work on those scales.
Throughout the 1800s and up to the 1920s, elderly Americans generally lived in absolute poverty. The Social Security Administration (SSA) created a pension system for elderly Americans. If you had worked, you got a US government pension. However, women and small merchants were excluded. Farmworkers and household servants also did not get social security pensions because most of them were Black.
The various New Deal programs spent about 42 billion dollars in the 1930s (about 740 billion dollars in 2020 dollars).
The Aftermath of the New Deal
Many today see Franklin D. Roosevelt’s New Deal as socialist and pro-labor. US Republicans still today despise the New Deal.
However, FDR was not a socialist. He was East Coast old wealth. Before he became president, he was fiscally conservative. He opposed some of his own administration’s New Deal programs.
FDR said over and over that his goal was to rescue American capitalism, not replace it. As the US recovered from the Great Depression, the New Deal programs ended.
When the Second World War started, FDR switched from The New Deal to Win the War. Under the flag of patriotism, which allowed him to give billions to factories to build weapons, the New Deal was quickly dismantled. By 1943, the US government budget was 40% of the GDP (it had been 8% earlier). Capitalists accepted this because the US military protected them from the Nazi, plus of course it was quite lucrative to be patriotic.
FDR’s programs created a deep change in the role of the US government. Before FDR, the US was in a practical sense just a loose association of 48 states, where each state controlled its own budget and politics, as intended in the US Constitution. But the US Constitution did not allow the federal government the power to take national action. The US Supreme Court voted again and again against FDR’s programs as a violation of the US Constitution. FDR solved that problem by increasing the Supreme Court from six to nine justices.
Fascist parties grew rapidly in Europe and the US because they promised jobs, restoration of national dignity, and a promise to punish those who were responsible for the Great Depression. Although wealthy industrialists and bankers owned and controlled Wall Street, Jews were accused of a global conspiracy to manipulate money. Jews were accused of being both capitalist and communists.
Many Americans today think fascism and Hitler happened only in Germany. Actually, fascism was widespread and popular in the US, England, and France. Leading Americans were fascist and there were mass rallies. Many of today’s well-known US organizations had their origin as fascist groups.
A combination of deeply irresponsible uncontrolled financial speculation in the late 1800s into the early 1900s, the disaster of the First World War (1914-1918), the 1917 Soviet Revolution, and the Great Depression (1929-1939) created extremist political parties, both on the right and left, to promise jobs, restore national dignity, and punish foreigners. This toxic brew of defeat, anger, resentment, and patriotism created the conditions for a greater disaster, the Second World War (70-80 million dead).
Where Are We Today?
What’s the situation today with the Corona / COV19 virus in March 2020? Medical researchers are projecting the lockdown could last six months or more. What would happen?
- Until a few weeks ago, 40-60% of Americans live paycheck to paycheck with no savings. Some 60% of Americans have only $400 in savings. If they go one or two pay periods without paychecks, they can’t pay apartment rent, home rent, or home mortgages, much less food or medicine. Landlords won’t get rental money, yet they must pay banks. Home loans and house construction are severely affected, which hurts realtors, bank loan officers, and construction workers, plus the secondary industries (construction supplies, equipment, lumber, paint, house furnishings, and so on.)
- Vacations, cruise ships, town celebrations, community picnics, weddings, family get-togethers, home coming, alumni events, corporate meetings, trade shows, and more will disappear for this year and many of these events may never return or they’ll return in diminished form. Tourist cities such as Paris, Barcelona, and San Francisco will see severe drop in visitors. Airlines, hotels, and AirBnB have lost 80-90% of their revenues.
- Public entertainment will disappear. Night clubs, comedy clubs, bars, sports events may disappear (dance halls were everywhere in the 1910s-20s, but disappeared after the Great Depression). Since people are not riding to restaurants and nightclubs, Uber and Lyft are in serious trouble.
- Movie theaters may finally disappear as everyone becomes accustomed to streaming video. A month or two of no audiences will drive many movie theater chains into bankruptcy.
- No more soccer, football, baseball, basketball, hockey, tennis, nor the hundreds of billions of dollars in the global games.
- The fashion industry may be cut back heavily: People dress well so others can see them, but when people live in lockdown, they wear sweatpants and old T-shirts. Men everywhere are letting their beards grow. No barbers, so shaggy hair may come back. Women’s hair salons and cosmetics are also cut back.
- One bright spot is our cats and dogs: they’re happy to have us at home with them all day.
The long-term, secondary repercussions have yet to start. Small schools, local newspaper, local business, and small towns depend on local business and local jobs. As these jobs disappear, local communities will shrink. An estimated 75% of small family-owned restaurants will disappear (in the Great Depression, half of US banks disappeared). The staff at small family-owned shops has often been there for decades and feel like part of a family. They'll have to go to fast food corporations which means low pay, zero-hour contracts, short-term jobs, no benefits, no support. (A zero-hour contract means a fast-food worker has been hired, but the contract does not promise any hours at all.)
The massive flood of money and the spike in prices caused by speculators, price gouging, and hoarders will also create inflation.
Many office workers are now working from home and they realize it works. So why live in downtown Manhattan, San Francisco, Los Angeles, or London if you can move far away and work online? The sky-high prices for big city apartment rents, condos, and houses will collapse, along with the bank loans on those properties, along with the property taxes that these cities expect. People who have mortgages on those condominiums will lose their condos and be obligated to continue paying.
This will bring about deep changes in the economic ideology of the US. The neoliberal ideology (low taxes, no regulation, no government) of the last 40 years in the US and UK ended in March 2020. Governments will switch to European managed economies of Germany, Sweden, and other countries. Many industries (not just companies, entire industries) will be nationalized (either they allow themselves to be nationalized or they sink).
If anyone still thinks neoliberalism, business, or entrepreneurs are the basis of the economy, they must now realize these will not solve this problem. They can’t. Only big government has the ability to do this.
At the moment, the US Senate expects the bailout will be two trillion dollars. However, that’s just a first payment. It can easily go to twenty trillion. In 2008, the banks crashed and the US bailed them out with quantitative easing (QE). How much? For nearly a decade, the amount of QE was a national security secret. A few years ago, we learned the US government gave twelve trillion dollars to banks in the US, the UK, Ireland, Germany, France, Japan, and other countries. The corona economic crisis is bigger than 9-11 and 2008 combined and on the scale of the Great Depression. Once again, the US will have to bail out the global banking industry, along with global industries in manufacturing, construction, airlines, hotels, shipping, and more.
Who will pay that? American workers, of course. Who else? Haven’t the billionaires suffered enough? Taxes will easily double for workers. Taxes will skyrocket for the wealthy. The GOP thinks this isn’t possible, but indeed, taxes averaged 81% from 1932 to 1981. Taxes must increase to those levels or there won’t be an economy. There’s no point in $75 million private jets or $500 million yachts if there’s nowhere to go.
There’s a joke going around among archaeologists these days, “The 19th century was followed by the 20th century, which will be followed by the 12th century…”
Okay, why is it called quantitative easing (QE)? The words make no sense. That vague name allows the government to pretend it doesn’t really mean “we’re just going to print lots of money and give it to the banks”. What if the ATM says you only have $10 so you just add a few more zeros and make it $100,000? That’s the magic of QE. The US GDP for 2020 (all economic activity) is twenty trillion dollars. The two trillion dollars for the March 2020 QE is ten percent of the US economy. Over the next five-to-seven years, it could go to twenty trillion. (Update March 28: Yep, Congress is now talking about the next four trillion in QE. Six trillion QE dollars is nearly 30% of the US GDP… in one year. What about 2021, 22, 23…?)
Will the COV19 Crash be a repeat of the Great Depression? I wrote this short history of the Great Depression so you can see what happened and how the government responded. The lessons of the Great Depression and the New Deal will change how the government handles this new depression. But what if we can’t find a vaccine for COV19? What if COV19 becomes simply part of our lives like the common flu where every month, hundreds of thousands get sick and thousands die? Nobody knows yet.
In a deeper sense, the COV Depression will be different because economics is not a natural science. Physics, chemistry, and other sciences study an objective world that exists apart from humans. Science has shown that gravity works the same way in Paris, on the Moon, and on planets around the star Sirius, but economists can‘t show how economics works because it doesn’t exist apart from humans. When we experience something that we don’t like, we change the conditions so it’s different the next time.
You can read an additional page about economics. See my review of Thomas Piketty's Capital and Ideology.