was The Depression of 1929 caused by unregulated capitalism? . . .

[OneBlueSky]

someone made that comment to me recently, and frankly I'm not enough of a student of economics to strongly agree or disagree . . . it makes sense intuitively and from what I do know, but is it generally considered THE primary cause of the depression? . . . if not, what role did it play? . . .

my interest stems from the continuing deregulation of corporations over the past quarter century and the state of the economy today . . . is there a cause and effect relationship? . . . is 1929 an accurate predictor of what we can expect? . . .

comments appreciated . . . thanx . . .

on edit: what's in the back of my mind is the question of whether or not the Democrats should address this issue head-on to counter the Republican line that deregulation is good because it "lifts burdens" from corporations and ensures a truly free market . . . personally, I think it's a crucial issue, but one that no one seems to be addressing . . .

[aquart]

1. Yes. Next question.

[izzie]

9. Wasn't that just one of the thing is a long line?

Before a wavy turns over it has to build. Just like WW1. The death of the archduke was just one of the things. But to make it easy to recall we just put it under one thing? Course I understand their are different thoughts on history. One is that it is one leader and the other is that it is a sort of work up of many things and society. I tend to think that your leaders are usually some one who gets in front of the pack and runs with it.

[malaise]

11. Ditto n/t

[Kiouni]

2. Have you read

Jennifer Government? I think it portrays a pretty accurate future were businesses rule the world more then governments do.
As far a your comment on the great depression i would have to direct you to the wikipedia article on it they give an excellent overview of the leading theories.

(The Jennifer Government Web page)
http://www.nationstates.net/

http://en.wikipedia.org/wiki/Great_depression

[OneBlueSky]

5. thanks for the links . . . the wikipedia article is somewhat lacking . . .

in it's discussion of capitalism, and particularly deregulation . . . the only direct comment is . . .

Capitalism to blame
The revolutionary left saw the Great Depression as the beginning of capitalism's final collapse. The idea mobilized the far left for action, but they failed to take power in any major country in the 1929-32 period.

guess talking about deregulation as a problem isn't something one does in polite circles . . . ;)

[acmavm]

3. Yep. And always remember one thing about the Depression. While

most of America sunk into poverty and stood in bread lines, the richest families in the country became even richer. The Depression was very, very good to them.

[Yupster]

23. At the peak of the depression

the unemployment rate hit 25 %.

[liberaldemocrat7]

4. One factor in the depression came from the stock market crash.

People could buy stocks on margin for as little as 10 percent of the value and then pay the rest by some schedule. Some people relied on the stock going up to help pay the rest of the original price instead of paying for it out of their cash or other assets. So in effect they got a loan but this turned into a gamble. However if the stock went down, the person would not have extra money to pay the rest of the stock price. many people did this and it led to this huge stock crash. They owed alot of money on their stocks but their stock had lost most of their value or the entire investment.

Now this stock crash spread throughout the business community and people lost businesses which led to unemployment and it also led to runs on the banks by regular people and business people for any cash that they could get out of their account.


You cannot buy stock on such a low margin any longer. You have for the most part savings accounts insured by the Federal government through the FDIC and you have stock offererings regulated by the SEC.

Well the exception today comes when you have Republican administrations and they tend to do what they can to favor irresponsible business practices then you get the Savings and Loan debacle and Enron debacles.

Republican congressional and Administrations tend to give us a financial failure laboratory in which Democrats through history has cleaned up their failures.

We do have one exception. Teddy Roosevelt busted Trusts in his administration although todays Republicans betray the legacy of Teddy Roosevelt.

Today presidents like Lincoln and Roosevelt would reject the modern day REPUBLIKLAN Party. In fact Teddy Roosevelt did reject his Republican party and ran as a progreesive in his Bull Moose party.

Ever since Republicans acted as irresponsible business enablers.

http://www.zazzle.com/maximus7/product/168739371435380271?idx=15&dt=&request=productSearch&term=&page=1&numRecsPerpage=20&sortBy=date_created&sortOrder=desc&sortPeriod=0&zidCategoryId=0&maturity=1&zidContributorId=238083065491105452&zcdProductType=0

[Kiouni]

6. wow i didnt

really ever bother to look at who contributes to who. and i read your boycott list and i thought, it figures i hate all of those places anyways.
thanks for the tip

[LeahMira]

27. That's also what I was told by those who were there...

Liberaldemocrat7, that's what my parents told me as well... something about buying on margin and selling short. They also said that laws were passed that would prevent the same thing happening again, but as you say, laws can't prevent abuses when the foxes are guarding the henhouse or when the businessmen are making the laws.

So many of us have pension funds invested in some account or other these days. It's downright frightening how vulnerable we all are, and how little this administration would be willing to do to save us if worse came to worst (ref. Katrina).

[Up2Late]

7. Yup, remember the term "The Roaring Twenties?"

That the 1920's they are talking about.

<http://www.snowcrest.net/jmike/20sdep.html>

<http://www.schoolshistory.org.uk/america/roaringtwenties.htm>
...The greatest boom was in consumer goods, e.g. cars, refrigerators, radios, cookers, telephones etc. Ordinary people were encouraged through advertising to buy these goods and many could now afford what had been luxuries before the war. One reason was that they earned slightly higher wages because of the boom. Another reason was that the growth of hire purchase meant that people could spread the cost over months and even years. But the main reason was that goods had become cheaper, e.g. 1908 the average cost of a car was $850 1925 the average cost of a car was $290.... (more at link above)

(remind you of anything?)

[fasttense]

8. I found this article to be very informative

"The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world. The depression began in late 1929 and lasted for about a decade. Many factors played a role in bringing about the depression; however, the main cause for the Great Depression was the combination of the greatly unequal distribution of wealth throughout the 1920's, and the extensive stock market speculation that took place during the latter part that same decade. The maldistribution of wealth in the 1920's existed on many levels. Money was distributed disparately between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. and Europe. This imbalance of wealth created an unstable economy. The excessive speculation in the late 1920's kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the maldistribution of wealth, caused the American economy to capsize."

http://www.gusmorino.com/pag3/greatdepression/

Both those conditions exist today.

[Yupster]

24. The agricultural sector

was in depression a few years before the stock market crash though.

[sendero]

10. Of course it was..

... it was a classic case of 1) easy credit (buying stock on margin) and 2) speculation.

We've had the exact same setup in our housing markets for 5 years now and they will suffer a similar result.

Greed seems to blind Republicans to the lessons of history. They are always claiming to be "conservative", but there is nothing "conservative" about how they handle money.

[ProfessorGAC]

12. The Answer Is "Essentially Yes"

It's not the whole reason, of course. But, it was a major contributor to the problem, in that too much money flooded equity markets without underlying capital to support that influx. Productivity gains were minimal in a pre-automation era, so the value of individual equities were grossly inflated. This meant nobody really had the value they paid for in investments.

Since banks were not regulated with respect to market investment, the banks flooded huge levels of capital in the equity markets as well. And with minimal oversight of leverage, they held stock portfolios FAR in excess of the capital actually paid, and therefore owed that liquid cash to someone, mostly the depositors.

So, when the bubble burst, the banks were out on a limb holding now somewhat undervalued equities, but even at actual value, far below the investment volume they had in those bundles. So, their liquidity dropped to negative numbers.

Without sufficient regulation of the banking industry, people's deposit value dropped to nearly zero, or banks folded because they had negative cash flow and liquidity. People's savings went with it.

Since companies were doing the same thing as banks with their cash and equivalents, they were highly leveraged in the market, appeared to be flush with additional investments and then took the same bath. As a result, their cash flows dropped to zero and they couldn't afford to pay the people that worked there. Those people lost jobs.

When those jobs were lost, consumption dropped dramatically, crushing the cash flow of the companies that weren't in trouble in the first place by hyper-leveraging in the market. It spiraled from there.

The biggest problem, imo, was that the banking industry was under-regulated, the equity markets were purely laissez-faire, and companies were allowed to leverage into the markets beyond their operational cash flows. The regulation of individual industries outside of finance was not really that lax anyway, so i don't think regulation, in general terms, was that much an overall influence.

It was the lack of regulation in a single critical element of any economy. Even in a socialist economy, cash flow is everything.
The Professor

[mmonk]

13. Basically a stock market without strict rules and oversight

and speculation with debt notes. The economic ideology of then and now is basically the same.

[izzybeans]

15. That was the tip of the iceberg. The crash was the first

time the business class felt the depression. Farmers and workers had been economically depressed the entire decade of the "roaring 20's". In fact it seems any time the economy is roaring we see a huge shift in income distribution; widening gaps. The 20's are what the 90's were to us. Huge sums of wealth were concentrated in no lower than the upper middle class, coupled with large consumer spending leveraged by growing interest debts. The burn is slower this time because in aggregate there is enough cash spread around to allow us to bail the water out of this boat. But a big event might sink it; like the market crash did.

[izzybeans]

14. The economic context is very similar to our own.

if only because economic regulation was present but not functional until the New Deal. We are nearly back to the end of the roaring 20's in that regard. Just as was true then various sectors of the economy have been depressed; starting with wages and on through massive consumer debts.

http://encarta.msn.com/encyclopedia_761584403/Great_Depression_in_the_United_States.html

The self-centered attitudes of the 1920s seemed to fit nicely with the needs of the economy. Modern industry had the capacity to produce vast quantities of consumer goods, but this created a fundamental problem: Prosperity could continue only if demand was made to grow as rapidly as supply. Accordingly, people had to be persuaded to abandon such traditional values as saving, postponing pleasures and purchases, and buying only what they needed. “The key to economic prosperity,” a General Motors executive declared in 1929, “is the organized creation of dissatisfaction.” Advertising methods that had been developed to build support for World War I were used to persuade people to buy such relatively new products as automobiles and such completely new ones as radios and household appliances. The resulting mass consumption kept the economy going through most of the 1920s.

But there was an underlying economic problem. Income was distributed very unevenly, and the portion going to the wealthiest Americans grew larger as the decade proceeded. This was due largely to two factors: While businesses showed remarkable gains in productivity during the 1920s, workers got a relatively small share of the wealth this produced. At the same time, huge cuts were made in the top income-tax rates. Between 1923 and 1929, manufacturing output per person-hour increased by 32 percent, but workers’ wages grew by only 8 percent. Corporate profits shot up by 65 percent in the same period, and the government let the wealthy keep more of those profits. The Revenue Act of 1926 cut the taxes of those making $1 million or more by more than two-thirds.

As a result of these trends, in 1929 the top 0.1 percent of American families had a total income equal to that of the bottom 42 percent. This meant that many people who were willing to listen to the advertisers and purchase new products did not have enough money to do so. To get around this difficulty, the 1920s produced another innovation—“credit,” an attractive name for consumer debt. People were allowed to “buy now, pay later.” But this only put off the day when consumers accumulated so much debt that they could not keep buying up all the products coming off assembly lines. That day came in 1929.

American farmers—who represented one-quarter of the economy—were already in an economic depression during the 1920s, which made it difficult for them to take part in the consumer buying spree. Farmers had expanded their output during World War I, when demand for farm goods was high and production in Europe was cut sharply. But after the war, farmers found themselves competing in an over-supplied international market. Prices fell, and farmers were often unable to sell their products for a profit.

[newportdadde]

16. Stocks bought on margin, lots of credit.. sort of like No money down ARMs

we see everywhere today. I guess another term might be unbridled speculation. Everyone thought they were going to get rich.. much like the late 90s stock market(excpet the margin buying) and now the ridiculous housing market.

Also keep in mind that after the initial market crash the market rallied quite nicely before it crashed again.. and again it recovered and stair stepped its way down.

Now our markets today have come back almost even today but remember in real dollar terms they are still down by quite a bit from their 2000ish highs. If you factor the depreciation of the dollar and inflation, the market sucks as a whole unless you have been in commodities.

Where is it going from here? Well housing is going to shift down and with it a great many jobs will be lost as our 'recovery' has been based on a LOT of job creation through Greenspan cheap money and an out of control housing market.

Personally since our saving rate never came back up as it typically does after recession I have always thought that we never truly left the recession. Individuals tried to borrow their way out to maintain their high consumption late 90s spending but we never actually came out of it the right way.

[fed-up]

17. thanks for inspiring the short history lesson with your question n/t

[ProgressiveEconomist]

18. SMU Prof Ravi Batra agrees with you. He got attention for

his correct prediction of the bursting of the "Internet bubble", a year before it happened. "Deficient demand" (google this) occurs when monopolists accumulate too much power and consequently wages for average workers lag behind productivity -- as they have since the Reagan years.

I would add that recessions since FDR have not plunged into depressions because of "automatic stabilizers" (google this) such as consumer dissavings, bank deposit insurance, unemployment insurance, cash welfare, "fiscal federalism" (google this), and other consumer and government expenditures that rose when economic growth went negative, and declined when the economy rose. I'd add as well that off-shoring also breaks the link between rising productivity and rising wages for average workers.

But because of Greenspan's policies at the Fed and on Reagan's "Social Security Commission", the consumer savings rate is now negative even at the top of business cycles. Because of off-shoring and Republican union-busting, unemployment insurance now covers a record-low proportion of workers. And because of Newt Gingrich, "welfare reform" has eliminated countercyclical cash welfare.

Here's part of the intro to the book in which Batra made his spot-on prediction, from the Library of Congress at http://www.loc.gov/catdir/samples/random041/99029467.html :

"Surviving the coming inflationary depression / Ravi Batra.

INTRODUCTION: A TORNADO ON THE HORIZON

Free enterprise functions smoothly only if the twin forces of demand and supply operate without constraints; this means that high competition prevails among firms so that wages rise in sync with productivity. Wages are the main source of demand, and labor productivity the main source of supply. If salaries lag behind productivity, as they have all over the planet due to the prominence of monopolies, the supply-demand balance can be maintained only through artificial means; eventually, artificial props give in, and demand falls short of supply, leading to production cutbacks, layoffs, and a recession. As wages trail productivity, profits and hence share markets jump. When the demand gap comes to the surface, stock prices drop, business and consumer confidence wanes, and a recession becomes inevitable. At this point, nations may resort to deficit budgets, monetary expansion, or foreign loans, and the problem may be postponed without instituting fundamental reforms that free the supply side from the constraints of monopoly capitalism. Eventually, bigger trouble follows, because share markets go into a frenzy, only to plummet when the demand gap returns with a vengeance. If a country has borrowed freely from abroad, its currency crashes, and both inflation and layoffs follow.

The long-term cure lies in restoring the balance between supply and demand rather than in short-term palliatives that create debt, strengthen the supply side, and relatively weaken demand. One proper policy, for instance, is to encourage high competition among industries and discourage mergers between large and solvent companies. But the whole world has been doing just the opposite at least since 1990, and now an economic disaster of an inflationary depression is simply inevitable.

Is there a way out? Not in the short term. But if we follow plain sense and introduce fundamental economic reforms to build a truly free enterprise system, then the crisis could be limited to just three years. However, if we resort to the usual artifacts of creating more government debt, monetary expansion, or both, then I am afraid the coming calamity could outlast the new decade, and we still would have to change our course eventually."

[rman]

19. Some argue that economic depression is to the disadvantage of capitalists,

since poor people don't buy much, so that doesn't help the rich to get richer.

One observation is that being rich is relative: being rich is to be be richer than someone else.
So besides getting more wealth for yourself, you can also become richer by making others poorer. Of course you can also do both at the same time - steal from the poor and give to yourself.

[kentuck]

20. "The business of America is business".

Remember Calvin Coolidge. They had the same taxcutters then as now. They believed everyone could get rich in the stock market. A chicken in every pot and a car in every garage. But greed has its consequences...

[Yupster]

25. Yet in 1929

less than 10 % of American families owned stock.

That percentage is much greater today. Over 50 % I'd guess?

[Junkdrawer]

21. The Fed cut the money supply by one-third from 1930 to 1931....

Federal Reserve and money supply
Monetarists, including Milton Friedman and Ben Bernanke, stress the negative role of the Federal Reserve System in turning a small depression into a large one by cutting the money supply by one-third from 1930 to 1931. With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve, especially the New York branch, which was owned and controlled by Wall Street bankers. The Fed was not controlled by President Hoover or the U.S. Treasury; it was primarily controlled by member banks and businessmen and it was to these groups that the Fed listened most attentively regarding policies to follow.

Friedman argues that:

"The serious fault of the Federal Reserve dates from the end of 1930, when a series of bank failures... changed the monetary character of the contraction. From then on, the economy was plagued by recurrent liquidity crises. A wave of bank failures would taper down for a while, and then start up again as a few dramatic failures or other events produced a new loss of confidence in the banking system and a new series of runs on banks.... From the end of October 1930 through July 1931, nearly 1,400 banks holding $1 billion in deposits or about 2% of all deposits in commercial banks failed, the money stock declined by 6% in addition to the 3% decline up to October, and deposits in commercial banks fell by 8%.... the System raised discount rates sharply....The measure was also accompanied by a spectacular increase in bank failures and runs on banks. .

Libertarian Murray Rothbard argues that the initial collapse of the Great Depression was simply the necessary monetary contraction that had to follow the inflationary policies of the Federal Reserve that initiated the boom of the 1920s.

Economic historian Ben Bernanke (and since 2006 Chairman of the Federal Reserve) pointed his finger directly to the actions by the Federal Reserve. He told Friedman, "Regarding the Great Depression. You're right, we did it. We're very sorry." <3> <4> <5>


http://en.wikipedia.org/wiki/Great_Depression

[robcon]

22. The cause of the depression was one thing: reduction in money

The recession of 1929 was turned into a depression because of the misguided decline by the Fed in the money supply: the absolute worst thing that a government could do in the case of a recession.

[Hippo_Tron]

26. That and America didn't have a fully devloped consumer culture

By 1929, Ford had trouble selling Model T's because too many people had already bought them. The idea of buying a new car every few years because you have the money to do so hadn't really set in yet.