Written by Michael Norris   

During the Great Depression of the 1930s, there were a lot of economic factors that exacerbated or prolonged the depression. On the monetary side, the Fed decided to tighten money in the face of massive unemployment and business failures. The Fed also allowed several banks to fail, such as The New York Bank of the United States. The bank failures led to panics, where savers pulled money out of banks, thus further shrinking the money supply. Without the ability to borrow money or even extend existing loans, many more business failed.

Another cause that turned what would have been a normal recession into the Great Depression was a deflationary spiral of assets. The first to be hit were stocks, which were at the time bought on 10% margin. So stocks were in essence bought with debt, which fueled a huge bubble in the Stock Market. Then the market crashed, and the brokerage houses started making margin calls to collect the money owed them. Many of the investors could not pay. Banks started to fail as debtors, who perhaps borrowed money to pay their margins loans, defaulted on other debts. Runs on the bank were common, and people began hording cash. The stock market began a long downward trend.

Other assets joined the deflationary spiral. Easy money in the 1920s had also caused a run up in real-estate prices, both in farms and residential housing. With the crash came foreclosures and the tight, almost non-existent credit market exacerbated the problem, so that real estate prices continued to drop for years.

With the election of Franklin D. Roosevelt and the implementation of his new deal policies, the economy and the country began to turn around. However, opposition to the administration’s policies by the Conservative Coalition (a coalition of conservative Southern Democrats and conservative Republicans) in 1937 after a contentious election where conservatives picked up votes in congress dealt a setback to the economic recovery. The Conservative Coalition tried to block new stimulus legislature, and even roll-back existing New Deal laws.

Eventually, the economic stimulus of World War II got the engine of the American economy going again, and the country knew a level of prosperity again in the fifties and sixties.

There are many similarities between the Great Depression of the 1930s, and what is being called the Great Recession. I prefer to call it Great Depression II because it is once again a worldwide depression, and the forces that started the depression have not all wound down or been regulated to the point where they can no longer pose a threat.

On the monetary side, Ben Bernanke has seemed to have learned the lesson from Great Depression I. Keep money in the system. Don’t let the credit markets dry up. Try to keep the banks from failing. Keep interest rates low to stimulate the economy.

We saw a steep deflation in stock prices after 2008, but the market has come back, although it is still subject to incredible volatility, as we have seen in recent weeks. More worrisome is the deflation in the housing market. Like in the 20s, easy money, and added in the 2000s – reckless and greedy lending practices - created a housing bubble of tremendous proportions. When the bubble burst, the financial institutions began to unravel, just as in Great Depression I. Fortunately, mortgage rates are low and fairly attainable, but there is no demand. People are afraid to invest their money in a house, as prices continue to fall due to competition with foreclosures. This is going to be difficult and long term problem to fix, just as it was in the 1930s.

Obama did pass a stimulus package, which according to the markets was responsible for what little growth we had after 2008. However, the climate in Washington is so bitterly partisan that another round of stimulus – which is needed to avoid a double dip recession and get some more jobs going – is not going to pass in the Congress, not after the bitter wrangling over the deficit and the debt ceiling.

The Republicans, and their cohorts the Tea Party, have formed a coalition like the Conservative Coalition in the 1930s. And despite evidence from history, they want to follow the same policies that almost reversed the progress of the New Deal, and which were major causes of Great Depression I: they want to block any stimulus spending, or indeed any spending at all, they want the Fed to reverse its easy money policy, and let the money supply dry up, (the contributing factor to Great Depression I). And they want to go into a round of deficit reduction and spending cuts at a time when we have seen from history that these are exactly the opposite thing we need to get the economy going.

And what about taxes? Herbert Hoover at the beginning of Great Depression I had a budget surplus so he decreases taxes by 1% in 1929. The following year, the surplus vanished as the economy worsened, but even attempts at tax increase at this point were useless.

Once again we have cut taxes, and to the surprise of no one except the Republicans, they have not created any jobs. There are vastly fewer jobs now than when Bush enacted the cuts, and the Republican and Tea parties want to continue this policy of draining income from the budget so they can make government smaller.

In the meantime Great Depression II roles along, more jobs are lost, and as a historical first, Standard and Poor’s downgraded US bonds from AAA to AA+. It is obvious to this agency that reducing the deficit by just cutting spending is ridiculous. For the country to prosper, we need a balance of revenue increases and expense reductions. Of course, they are thinking as financial analysts, not at politicians.

So once again we are faced with a Great Depression, Great Depression II, and once again conservative legislators are bringing out the same tired party dogmas that didn’t work in the Great Depression I.

What about war? Can a war get the economy on track? The last, and perhaps only, war that stimulated all of the American economy was World War II. The aftermath of Viet Nam was recession and stagflation. Gulf War I didn’t do anything for the economy, and Gulf War II and Afghanistan are more of a drain on the economy than anything else. The production of war material is now highly automated. Rosie the Riveter no longer builds planes. The defense plants are in specific areas of the country, so they present no widespread opportunities for jobs except for engineers and scientists. Who profits from these companies? The CEO, the President, the Chairman of the Board, and the stockholders. Is reducing their taxes going to create jobs? Absolutely not. It will just make the people that make the money even richer.

So I suggest that the Republicans and their Tea Party fellow travellers go back to the history books and take a hard look at what worked and what didn’t work in Great Depression I. And then drop the religious dogma of no taxes and small government, and come up with something that, with the help of their Democratic brethren, will put this country back on track and create jobs.