How It Was: The Year After the Crash of 1929

The reality is that since our Great Recession is only a year old, it may be silly to interpret every upward blip as a sign that it's almost finished. The Great Depression lasted ten years, and probably ended only as a result of the economic pump-priming that occurred as we prepared for the Second World War. The Great Depression and the Great Recession are failures of the free market system, and without serious change in the way we do business in America, catastrophic crashes will certainly occur again down the road.

Meanwhile, we need to take the history of the Great Depression seriously. What was the situation, the mood, and the prognosis in 1930, during the year following the Great Crash?

In 1930, the population of the United States was 122 million, and evidently hardly anyone in the country understood the hardships that lay ahead of them. Certainly, American culture and innovation were booming. The year 1930 saw the introduction of Wonder Bread; Mott's applesauce; new airlines like United, TWA, and American; windshield wipers, and pinball machines. Contract bridge and backgammon were all the rage. The movie actress Jean Harlow was a sensation in the movie Hell's Angels--produced by Howard Hughes. A primitive computer called a "differential analyzer" was introduced at MIT.

The rich were still rich. A Buick advertisement said it all: "Today the discriminating family finds it absolutely necessary to own two or more motor cars."

That's how it was: the rich were "discriminating" and everyone else was--what?

Early in the year, a minor bull market drove up stock prices of U.S. Steel, General Motors, and General Electric, which led to a wave of optimism among political and business leaders. (Sound familiar?)

But the clouds of misery were gathering. In April, in New York, 400,000 depositors at the Bank of the United States (a private bank with no connection to the government) found the doors locked and their accounts frozen for lack of bank assets. By the end of the year 1,300 banks had failed.

The unemployment figure was 4.5 million and slowly rising. In December, the Republican Hoover Administration appropriated $115 million for construction projects that would put some people back to work--a program that turned out to be as inadequate as throwing a spitball at a rushing rhinoceros. Part of the program was the ridiculous donation of surplus apples to 6,000 unemployed, the apples to be sold for five cents each.

Prognosis? In 1930, every time a supposed "expert" opened his mouth, what came out was a blatant stupidity about the economic situation:

Andrew Mellon, the Secretary of the Treasury, started off the year with a bang: "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." (The similarities to the statements of the present Secretary of the Treasury are chilling.)

The Secretary of Commerce, Robert Patterson, broadcast the same cheer in March: "With the usual increase in out-of-door work in the Northern states as weather conditions moderate, we are likely to find the country enjoying the accustomed state of prosperity."

In May, President Herbert Hoover blew his bugle of optimism: "I am convinced we have now passed through the worst and with continued unity of effort we shall rapidly recover... There has been no significant bank or industrial failure. That danger, too, is safely behind us." One month later, Hoover announced: "The depression is over."

As Americans, we need to understand that a free-market economy is essentially a free-market casino--with a few big winners and too often many millions of losers. The big winners may be experts about free-market casino gambling, but they are not experts at predicting the fundamental future of the country. The history of the Great Depression tells us there is really no reason to be optimistic at this point. It seems to me we would be better off assuming the worst, understanding that we may be in for a long-haul of bad economic times unless new and drastic measures are put in place.

Parenthetically, there's a political lesson for the current administration. Herbert Hoover was in the White House during the first three years of the Great Depression, and by the time voters came to the polls in 1932, the economic situation was so bad they threw him out in desperation and elected the leader of the opposition party--Franklin Delano Roosevelt. They threw Hoover out despite the pubic paranoia about socialism. In 2012, Barack Obama will have been in the White House four years after the start of the current Great Recession. If there's a long haul of misery ahead, 2012 will be much worse than 2009 or 2010, and it's likely Obama will be a one-term president. He will be thrown out of office despite any public fears about unregulated capitalism. The Republicans in and out of Congress know this, and that's why they're working so hard to keep the Great Recession crippling the country until the next election. If we don't come out of this mess before 2012, the next administration will likely be Republican.