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"Understanding the Great Depression
 & Failures of Modern Economic Policy"
 by Dan Blatt - Publisher of FUTURECASTS online magazine.

 Explaining the Great Depression and failures of "New" Keynesian interest rate suppression policy without ideological clap trap, theory confirmation bias or political spin.

Table of Contents & Introduction
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"Understanding the Economic Basics & Modern Capitalism: Market Mechanisms and Administered Alternatives"
by Dan Blatt - Publisher of FUTURECASTS online magazine.

Smith: Wealth of Nations.   Ricardo: Principles.
Marx: Capital (Das Capital).   Keynes: General Theory.
Schumpeter: Capitalism, Socialism and Democracy.

Economics is the miracle science. Even imperfect capitalist markets routinely raise billions out of poverty.

Table of Contents & Chapter Introductions

BOOK REVIEW

FREEDOM FROM FEAR
By
David M. Kennedy

(Part I: The Great Depression)

FUTURECASTS online magazine
www.futurecasts.com
Vol. 3, No. 2, 2/1/01.

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 Sloppy scholarship:
  Grossly sloppy scholarship is the only appropriate verdict for the first few chapters - covering the stock market crash of 1929 and the first two years of the Great Depression - of David M. Kennedy's "Freedom From Fear," an important segment of The Oxford History of the United States.
 &
 

  Great Depression era scholarship must be able to navigate the mine fields of the advocacy scholarship of twentieth century ideologues like John Kenneth Galbraith, who has admitted a lifetime effort to support his socialist proclivities with intentionally twisted scholarship. (Paul Krugman refers to him as a primary example of the academic "policy entrepreneur.")
 &
  David Kennedy clearly lacks the competence in economics
to cover this subject. His acceptance of the various left wing ideological myths about the causes of the stock market crash of 1929 and the Great Depression are supported by scholarship that can only be described as grossly sloppy.
 &

     Much better is Kennedy's coverage of Hoover Administration and New Deal responses to the Great Depression, and the years immediately preceding the attack on Pearl Harbor.
 &

 More sloppy scholarship:

   However, grossly sloppy scholarship is the only appropriate verdict for the coverage of World War II in the second half of this important segment of The Oxford History of the United States.
 &
  For Part II of this Book Review, covering portrayal of WW II, See, Freedom from Fear II.
  &

 

   World War II scholarship must include the ability to understand the realities of the WW II battlefield, and at least a familiarity with the commonly known events of the conflict.
 &
  David Kennedy clearly lacks the competence in military history or the understanding of WW II tactics and battlefield strategy needed to cover this subject. His efforts at military analysis are simplistic, one sided, and sometimes ludicrous. His ignorance of commonly known facts is disconcerting.

  With so many competent economic and military historians available, why in the world would The Oxford History of the United States give David Kennedy the job of writing this book? How could this grossly incompetent effort get past the editors?
 &
  And what - pray tell - has happened to the intellectual standards of those who selected this seriously defective work for the Pulitzer Prize in History?

The Causes of the Great Depression

 The left wing myth of capitalist instability:

 

As late as the 1960s, an "automation" scare was taken seriously by leading Keynesian economists.

   The ideological battle over the causes of the Great Depression is reflected in the competing theories touched on by Kennedy. Wisely, he does not presume to provide an extensive economic analysis of these theories, but nevertheless, clearly accepts the theories of the left wing ideologues.
 &
  Kennedy favors explanations based solely on domestic economic conditions - such as disparities of wealth - insufficient demand - and capitalist overproduction. Since Karl Marx, these are the classic elements blamed by left wing ideologues for capitalist instability.
 &
  In the 1950s, this stupidity resurfaced as the "automation" scare. Many supposedly knowledgeable people - including Paul Samuelson in his leading economics textbook - expressed the fear that computers would destroy more jobs than they would create. More recently, we have had the obviously stupid assertion by critics of modern capitalism that most of the new jobs that have in fact been created are low wage unskilled "hamburger flipper" jobs - which actually account for only about 20 percent of the total. The history of the Luddites taught them nothing.
 &

 

 

 

 

For left wing ideological purposes, it is vital that the mythological inherent instability of capitalism - not the stupid economic policies of governments - be blamed for the Great Depression.

 

 Kennedy ignores the 800 pound gorilla - the collapse of international trade and commodity markets in the spring of 1930.

   Heavens forbid that government policies - such as those having to do with war - reparations and war debts - international treaties - and trade war restraints and product subsidies - should be blamed as the primary causes of this disastrous economic collapse. For left wing ideological purposes, it is vital that the mythological inherent instability of capitalism - not the stupid economic policies of governments - be blamed for the Great Depression.
 &
  Thus, Kennedy almost completely ignores the international financial crisis in his explanation of the Great Depression's first 18 months. According to Kennedy, it was essentially a domestic problem, with domestic causes - principally having to do with ideologically satisfying notions of capitalist instability - until the international financial meltdown of 1931.
 &
  Kennedy accepts the argument that the United States was not substantially affected by the economic impacts of the heavy international financial obligations arising from WW I and the Treaty of Versailles - or by the product subsidies, tariffs and other trade restraints of the 1920s trade war. He doesn't deny that they played some role in the worldwide economic problems of the day, especially in Germany. WW I debts heavily burdened many of the most important trading partners of the U.S. - and many of its most important export markets were substantially diminished by the trade restraints. However, Kennedy emphasizes that only 8% of the U.S. economy was accounted for by foreign trade.
 &
  The worldwide economic havoc that these political policies caused before the autumn stock market crash of 1929 and during the first 18 months of the Great Depression are thus grossly underplayed. The declines that began in the summer of 1929 became an avalanche in the spring of 1930. Kennedy ignores the 800 pound gorilla - the collapse of international trade and commodity markets in the spring of 1930, and their continued rapid decline thereafter.

Impact of Global Markets on Agriculture, Mining, and Autos:

  This insistence on domestic causation leads to several obvious inconsistencies of varying importance - to several factual errors of varying importance - and to several important factual omissions.
 &
  The most important and obvious inconsistency and factual omission has to do with agriculture.

 Agriculture's dependence on international markets:
   The importance of agriculture at that time is correctly emphasized by Kennedy. Well over 40 percent of the population was still rural, and more than 20 percent of the work force still found employment on the farm.
 &


 Sloppy scholarship:

 

The market prices of major agricultural commodities such as the grains and cotton were hugely dependent on export markets.

   Kennedy first overemphasizes the problems faced in the 1920s. He is apparently unaware that farm income never declined below the prosperous levels of the prewar years 1910 through 1913, and except during the depressed period of 1920 through 1923, actually ran more than 50 percent above those prewar levels. As Kennedy notes, the four years just before WW I were very prosperous years for agriculture.
 &
  Of course, the creative destruction process of the capitalist system was at work - there were always marginal farms that were in trouble and in the process of being forced to sell out - and six million American farmers and farm workers moved to the cities - where workers typically earned four times as much as on the farms. However, farm acreage kept expanding to new record levels well into 1927.
 &
  Farmers were the hardest hit victims of the Great Depression, as Kennedy properly notes. However, he never connects that fact to the continuing and worsening trade war.
 &
  Kennedy never mentions the predominant role that the trade war played in the ultimate destruction of agricultural commodity markets worldwide and in the U.S. Without explanation, he remarks just once about the "shrinking export markets" for U.S. agricultural products.
 &
  The market prices of major agricultural commodities such as the grains and cotton were hugely dependent on export markets. The collapse of agricultural exports began to seriously affect U.S. agricultural prices in August, 1929.
 &
  In the five years prior to 1929, exports equaled about 40 percent of domestic wheat consumption. Wheat exports ran substantially more than 50 percent lower during the next three years - and practically disappeared in the five years thereafter.

  There was no way that domestic agricultural markets could stand such blows. There was no way that the American economy could withstand such blows to its huge agricultural sector. There was no way that the U.S. economy or its agricultural sector could recover without the recovery of its agricultural export markets.

 More sloppy scholarship:

   Trade war tariff and quota restraints and price subsidies played a major role in causing and encouraging the gross overcapacity that plagued agriculture long before the '29 Crash. Kennedy never mentions this obvious and important fact.
 &
  In 1928, huge surplus carryovers were left by record wheat crops in the U.S. and around the world. Those carryovers grew substantially bigger in 1930 and 1931 as government price subsidies predictably provided incentive for the planting of additional bumper crops.
 &

     Protectionism encouraged substantial expansion of European wheat acreage. German acreage increased 40 percent during the 1920s. U.S. grain markets crumbled in the early spring of 1930 after reports that European crops would be more than big enough to meet all European needs in 1930. By May, 1930, Federal Farm Board price supports were overwhelmed.
 &

 Cumulative impacts of international dislocations:

The collapse of commodity prices and automobile exports played a major role in bringing the substantial spring, 1930, business revival to a crashing halt.

  Foreign trade might have comprised just 8 percent of the U.S. economy, but its cumulative impact on agriculture - and on mining commodities such as copper that were also highly dependent on world markets - was obviously not a minor matter.
 &
   The collapse of international silver prices in the spring of l930 caused the collapse of all currencies denominated in silver - and the collapse of prices for American cotton. Before the end of May, 1930, the collapse of the international markets for silver, copper, cotton, and the grains brought the solid spring, 1930 domestic business revival to a crashing halt.
 &
  Auto manufacturing was also heavily affected. Auto exports in 1928 and the first quarter of 1929 were about 20 percent of total sales. Auto export percentages were cut almost in half by the first quarter of 1930 - a loss of about 40,000 units per month.

  Apparently, Kennedy is blissfully ignorant of all this. More obviously sloppy scholarship.

 Tariffs:

   Kennedy correctly rejects the extreme view that American tariffs were alone the cause of the Great Depression. However, he also rejects the view that they played a major role in the onset of the Great Depression. This evidently applies to both the '29 Crash and the subsequent failure to recover.
 &

 

European dependence on American loans:

 

 

 

 

 

 

 

 

 

 

Cumulative impacts of the trade war:

  He asserts:

"[As one historian put it, American tariffs since 1922] were 'already - - - high enough to cause a depression if a tariff can have such a result.'"

  Apparently unaware of the inconsistency, he elsewhere points out one of the reasons why those tariffs didn't - alone or with other causes - lead to depression before 1929.
 &
  During the 1920s, European finances were burdened with WW I financial obligations and American trade restraints that limited exports to the United States. However, they were propped up by loans from United States sources. Only those loans enabled Europe to maintain some semblance of financial stability. Unfortunately, American tariffs prevented its European debtors from earning the wherewithal to service these debts.
 &
   Incredibly, Kennedy blows the widely known and reported fact that the American loans that maintained European financial stability during the 1920s suffered a drop of about 50 percent in 1929 - starting early in the year. He attributes this entire decline to just the last quarter of 1929 - after the Crash. He totally ignores the significant outflow of European investment capital fleeing stagnant economic conditions in Europe and seeking profits in Wall Street during the first eight months of 1929. As a result of these two factors, European interest rates were driven up to depressing levels months before the October Crash.
 &
  Most importantly, the cumulative impacts of the tariffs and other trade war activities are totally ignored. Even the most stupid economic policies may take years to set in motion economic events noxious enough to throw strong capitalist systems into depression.
 &
  The massive role obviously played by international developments in the Crash of '29 and the aborting of the spring, 1930 business revival, had their roots in the WW I financial burdens and the 1920s trade war in which U.S. tariffs played such a vital role.

The Crash of 1929

 The left wing myth of stock market irrationality:

   Kennedy asserts:

  "No observer has succeeded in pinpointing the spark that set off the roaring conflagration that swept and eventually consumed the securities markets in 1928 and 1929."

     Kennedy chooses to portray the 1929 Crash as essentially a domestic phenomenon. By ignoring international causation and relying on grossly sloppy scholarship with respect to domestic economic developments, the stock market boom and bust are made to appear totally irrational.
 &

   Uncritically accepting yet another left wing myth, Kennedy asserts that the doubling of stock market prices in the last two years before the 1929 Crash was totally irrational.

   "[B]y 1928 the American stock markets had slipped the bonds of surly reality. They catapulted into a phantasmagorical realm where the laws of rational economic behavior went unpromulgated and prices had no discernible relation to values. While business activity steadily subsided, stock prices levitated giddily."

 Relying on Galbraith as a source can be hazardous to your scholarship.

   The notorious advocacy scholar, John Kenneth Galbraith, is one of his cited sources for this florid assertion. Galbraith has admitted that, during the decades before 1990, he felt a keen ideological urge to support his socialist proclivities by twisting his scholarly work. He was a harsh critic of capitalism, and repeatedly presented capitalism as an essentially irrational and unstable system.
 &
  Today, having perforce abandoned socialism and anxious to justify his fall back ideology of the entitlement welfare state, Galbraith has become the champion of capitalism - asserting its strength and stability - and its clear ability to bear the burdens of a substantial welfare entitlement.
 &
  Consistency is certainly not the hobgoblin of Galbraith's ideological mind.
 &

Economic decline in the second half of the 1920s:

 

Very sloppy scholarship:

 

Kennedy somehow manages to miss one of the greatest economic booms in the nation's history.

 

 

 

 

 

 

 

&

  More grossly sloppy scholarship is relied upon by Kennedy to support the assertion of stock market irrationality.
 &
  Kennedy asserts that the nation was in economic decline from as early as 1925, and that "business activity steadily subsided" thereafter.

  • First: The implication of economic decline extending back to 1925 is blatantly false - although there was a short recession in 1927.
  • Second: In fact, their was NO evidence of economic decline in 1928, which turned out to be a very good and prosperous year for business. The second half of 1928 was one of record breaking economic performance, and by the first quarter of 1929, economic prosperity was shattering almost all economic records.
  • Third: Even agricultural prices hit excellent levels in July and August, 1929 - well above Federal Farm Board support levels - aided by reports of crop failures in several important exporting nations.
  • Fourth: It was widely noted that the usual summer business slowdown was particularly mild in 1929, providing even further rational cause for optimism.
  • Fifth: Stock market optimism was thus based on solid performance in the domestic economy. Where market optimism proved excessive was in the broad tendency to overlook the gathering economic and financial storm coming from abroad. The vast majority of people and officials then made the same mistake that Kennedy makes now. Outside the economics profession, there were only a very few individuals at that time who realized the importance of international economic developments and foreign trade.
  • Sixth: A doubling of stock market prices is hardly unusual for a period like the one that begins during the depths of the 1927 recession and extends through the height of the business boom of the first eight months of 1929.

Automotive industry problems:

 

More sloppy scholarship:

Kennedy manages to miss the fact that the 1929 auto sales and production figures shattered all records.

  Kennedy further asserts: "automobile manufacturing slowed its prodigious growth as early as 1925."
 &
  Really?
 &
  I guess the excellent sales and production levels
of 1928, and the massive new production records of the first quarter of 1929, occurred on Mars. I guess the continuation of good domestic auto sales until May, 1930 - six months after the '29 Crash - was a mirage.
 &
  Elsewhere, Kennedy notes that well over 5 million cars were sold in 1929. Doesn't he know that this easily smashed all previous records?
 &

Business inventory buildup: 

 

More sloppy scholarship:

 

Kennedy seems oblivious to the widespread acknowledgment that business inventories were not excessive outside the automotive sector.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

&

   He further asserts:

  "Business inventories began to pile up in 1928, nearly quadrupling in value to some $2 billion by midsummer of 1929."

  Ah, the misuses of statistical evidence. Statistics are never the end of the argument - they are just the beginning. Without intelligent interpretation, they are worse than useless. Kennedy just delivers the inventory statistic - without any context.
 &
  Except for those automobiles - which had been grossly overproduced in the first half of 1929 despite (or because of) record exports and domestic sales levels - business inventories as a percentage of sales remained at reasonable levels until the last half of 1930 - a full year after the '29 Crash.
 &
  The financial pages were full of reassurances that - unlike the 1921 depression - there were almost NO excess business inventories during that period. Even those huge automobile inventories were sharply reduced before the spring of 1930, as auto sales remained above the excellent levels of 1928 (but of course below the boom levels of the first quarter of 1929) until May, 1930.
 &
  In fact, the lack of excess business inventories in 1930 provided the primary reason why almost all contemporary commentators expected nothing more than a mild economic slump and a quick recovery - as had happened during previous business cycle slumps during the 1920s.
 &
  Indeed, rather than being weighed down by heavy inventories, U.S. Steel reported record and near record unfilled orders backlogs through August of 1929, despite production levels at and sometimes above 100 percent of rated capacity. Retail sales, railroad car loadings (a vitally important economic indicator in those days), and just about every other economic indicator outside the agricultural, construction and auto production sectors, were also at or near record levels well into the summer of 1929.
 &
  Of course, there were other "inventory" problems, especially in those agricultural and mining sectors heavily influenced by world markets. Commodity surpluses were a terribly important problem, with an obvious and direct relationship to trade war subsidies and restrictions on international trade. However, as noted above, with reports of crop failures in several important exporting nations, even agricultural prices hit excellent levels in July and August, 1929.
 &
  Of course, all inventories experienced a natural and healthy growth as sales accelerated for almost all products through the first quarter of 1929. Also, because of their great expense, an inventory accumulation of trucks and automobiles would severely impact national inventory figures and distort the overall picture until these inventories were substantially liquidated before the spring of 1930. Automobiles were very important, but an inventory accumulation for even this one product was not by itself a sign of broad economic deterioration.
 &
  Indeed - outside the big ticket items like homes and cars, and - inevitably - men's clothing - retail sales volumes remained remarkably resilient near the excellent 1929 levels for a year after the 1929 Crash. Of course, prices responded flexibly to the economic downturn by immediately beginning to decline - substantially impacting the dollar volume of sales.
 &

Irrational stock market optimism:
    Even the implication of irrational stock market optimism is weak - given the lack of appreciation for the threats from the growing international financial crisis - a lack of appreciation that continues to this day - and which Kennedy does nothing to dispel.

 The 45 percent drop in NYSE values by the end of 1930 almost precisely matched the decline in 1930 corporate earnings -
hardly a collapse from some "phantasmagorical realm" of overoptimistic prices.
  • Except for about 50 growth leaders, the vast majority of issues remained at realistic levels based on traditional price/earnings ratios.
  • Even for these growth leaders, the vast majority traded at between 20 and 30 times earnings in August, 1929 - the last full month before the start of the market decline. This is a figure that looks quite reasonable for growth leaders during prosperous times by today's standards.
  • Finally, the total loss on the NYSE at the end of 1930 - from its "giddily" high prices in 1929 - was about 45 percent -- almost precisely matching the decline in corporate earnings nationwide. This is hardly evidence of a market collapsing from some "phantasmagorical realm," where prices had "no discernible relation to values." 

 There was indeed irrational optimism - about the competence of the world's political leaders.

   While excessive investor optimism is not in question, the direction of the market was never without rational foundation in domestic economic developments. The primary error was not economic - it was political.
 &
  Until the fall of 1929, investors simply never considered the possibility that political leaders would not only fail to take the measures needed to deal with the international crisis, but would actually enact measures - like the Smoot Hawley Tariff - that would make the international crisis worse.
 &

Kennedy fails to point out the irrationality of the U.S. policies on war debts and tariffs.

   Kennedy accurately portrays the war debt politics. However, he never discusses the irrationality of the American policy position.
 &
  The U.S. - then the world's greatest creditor nation - insisted on debt repayment while imposing high tariffs that closed its markets and prevented the debtors from earning the wherewithal to make those payments. All Kennedy offers is that the tariffs "helped to clog the arteries of world trade ---."
 &

 The Smoot-Hawley Tariff:

 

 

&

   American responsibility for the trade war is seriously understated by Kennedy due apparently to his ignorance of developments affecting international trade.
 &
  He asserts:

  "Economically, the Hawley-Smoot Tariff signaled the world that as the depression lowered the United States was moving toward the same autarkic, beggar-thy-neighbor, protectionist policies with which other nations were already dangerously flirting."

Kennedy ignores the fact that America was the primary culprit in the trade war.

 

The collapse of world trade:

 

 

 

Kennedy ignores the inexorable decline in foreign trade at multiple double digit rates during the first 18 months of the Great Depression.

   The high American tariffs enacted in 1922 were previously mentioned by Kennedy. However, he totally ignores the fact that - since that time and well before the Smoot-Hawley Tariff of 1930 - the United States already had the highest tariff barriers in the world, except for those of Spain.
 &
  The U.S. was not following foreign autarkic trade war practices - it was already the clear leader. The Smoot-Hawley Tariff  initiated a new and more vicious worldwide round of increases in tariffs and other trade restraints.
 &
  Kennedy asserts that world trade collapsed in mid-1931 with the financial crises of Central Europe and Great Britain.
 &
  Kennedy is apparently ignorant of the fact that world trade had begun to weaken in the second quarter of 1929 - that it had been falling below prior year levels since the last quarter of 1929 - and that this decline had accelerated to multiple double digit rates since the first quarter of 1930. Yet he elsewhere notes that U.S. foreign trade dropped from $36 billion in 1929 to just $12 billion in 1932.
 &
  Does he think this all happened after the middle of 1931? In fact, the decline was inexorable and remarkably steady from the middle of 1929 - shortly after American lending began to dry up - through 1932.
 &
  This collapse of international trade was the result of the cumulative impacts of a decade of trade war policies (for which the United States was the primary - but of course not the only - culprit), and the WW I financial obligations that the trade war made impossible to bear.

&

 The severity of stock market losses:

 

 

 

&

   Kennedy displays a disconcerting unfamiliarity with the economic data available to economists and investors in 1929.

  He asserts twice:

  "The stock market had by April 1930 recouped about one-fifth of its slippage from the speculative peak of the preceding autumn."

  Also:

  "By mid-November [1929] some $26 billion, roughly a third of the value of stocks recorded in September, had evaporated."

 

 More sloppy scholarship:

   Lets, see.
 &
  Total value on the NYSE
hit about $90.5 billion on September 19, 1929 - declined to about $48 billion on November 13, 1929 - and recovered all the way up to about $79 billion on April 10, 1930. My (admittedly cheap) calculator indicates a loss of about $42.5 billion - about 47 percent - and recovery of about $31 billion, amounting to almost 73 percent of the loss.
 &
  The total loss between September 19, 1929, and April 10, 1930, was only about $11.5 billion - not including events in the bond markets, which moved broadly higher during this period. Kennedy totally overlooks this bull market for bonds.
 &
  Beyond any peradventure of a doubt, securities market losses did not initiate the Great Depression or prevent recovery in the spring of 1930.
 &
  To his credit, Kennedy strongly rejects
the view that the '29 Crash of stock values was the cause of the Great Depression.
 &

 Worldwide Depression:
   However, he asserts that the world wide Depression was started by the Crash and economic decline in the U.S. He is clearly many months late.
 &

 All European nations other than France and the Scandinavian nations were in serious economic trouble months before the October, 1929 stock market crash.

   In fact, the flow of credit to Germany had dried up in the summer of 1929. This undermined both Germany's ability to make reparations payments and the Allies' abilities to make war debt payments. More immediately, this dried up credit needed for ordinary commercial financing. Indeed, the high interest rates and high returns on market investments in New York, and confidence in the value of the dollar, had been drawing funds out of Europe for most of the year - causing unsustainably high interest rates in Europe.
 &
  Thus, Germany was in depression well before the fall of 1929, and all European nations except France and the Scandinavian nations were in serious economic trouble as well.
 &

The "confidence game:" 

 

 

More sloppy scholarship:

   Ignorance of the economic data available at the time is most clearly demonstrated when Kennedy discusses the optimistic statements of Pres. Hoover in May and June of 1930. Because of the substantial business revival of the spring of 1930, Hoover asserted that the depression was over.
 &
   Kennedy argues:

  "Given available information, and given the scale against which the events of late 1929 and early 1930 could then be measured, these statements were not as outrageous as they appeared in retrospect."

 "Confidence game" assertions of imminent economic revival were made by political, business, and academic authorities - but by May, 1930, were no longer able to fool anybody - except now, for Kennedy.

  In fact,

  • with the collapse of the international markets for silver, copper, cotton, and the grains,
  • and the corresponding collapse of purchasing power for China, India, and those Latin American and other nations that denominated their currencies in terms of silver,
  • and the collapse of rural real estate values,
  • and the slippage of railroad car loadings and steel production in April and May of 1930 during a period of the year when economic activity is usually rising,
  • and growing reports of increases in unemployment and declines in manufacturing payrolls,
  • and a host of other statistics available in the financial press of the day,

there was no doubt in anyone's mind that - by May, 1930 - the vigorous spring business revival had aborted and the Depression decline would continue at least until the autumn.
 &
  Of course, this didn't prevent optimistic "confidence game" assertions by businessmen, a few economists like Irving Fisher, some financial columnists, and Hoover and some other government officials - all hoping that the Depression could be ended merely by "restoring confidence," and ending "unreasoning pessimism." By May of 1930, this fooled nobody - except, now, for Kennedy.
 &

Statistical gamesmanship:

 

 

 

 Farm sector hardships:

   More than mere error, Kennedy is not above playing his own statistical games.

  Overstating agricultural problems during the 1920s, he notes that agricultural commodity prices didn't regain WW I levels until WW II.
 &
  Well, of course not.
Wartime commodity prices never outlive the conflict. As stated above, the more accurate comparison is with farm income during the prosperous four years prior to WW I - which were always exceeded during the 1920s - and were exceeded by more than 50 percent in the years after the 1920 - 1922 depression.
 &

 Financing speculation:

 

 

 

&

  Also, he asserts:

  "By 1929 commercial bankers were in the unusual position of loaning more money for stock market and real estate investments than for commercial ventures."

  Sounds bad, doesn't it?
 &
  In the accompanying footnote, however, we learn that this amounted to just an 8 percentage point decline in the share of lending for commercial loans over the course of a decade and a half - from 53 percent before WW I to 45 percent in 1929 - and just a 5 percentage point increase in the share for securities loans - from 33 percent to 38 percent. This is hardly an earthshaking shift.

  With this incompetent foundation, Kennedy fails to provide a factual basis for understanding the causes of the Great Depression - the subject of this half of his book.
 &
  By ignoring or misrepresenting the actual details of business developments during that period - and ignoring the obvious cumulative impacts of the WW I financial obligations and the 1920s trade war - and ignoring the raging international financial and economic crisis of 1929 and 1930 - Kennedy continues the left wing tradition of presenting the market boom and bust as unexplainable and probably irrational - proof of inherent capitalist instability and reason for an expansive view of the government's role in economic management.

  For those who want to have the facts needed to understand the pivotal events of this traumatic period, see links in Great Depression Chronology beginning with "The Crash of '29," and "Rebound from the Crash of '29." These articles provide the most complete, accurate and non ideological account of the Great Depression available anywhere.

America During the Great Depression

  Kennedy is on much firmer ground once he gets away from the ideological minefield of the causes of the '29 Crash and the Great Depression.

 The Hoover Administration:
   A very fair and properly nuanced account is provided of the actions taken by the Hoover Administration - their limitations - the war debt politics that constrained them - and the complicity of the Congressional Democrats in their failure. He provides good portrayals of the nation's chaotic banking system and its regulatory problems.

The New Deal

  The successes and failures of the major New Deal programs and initiatives are portrayed in a perceptive and finely balanced manner.

 New Deal politics:

 

 

 

&

   The negligible economic success and great political success of FDR's New Deal approach is accurately portrayed. The New Deal realigned the progressive Republicans with the Democratic party while holding the southern conservative base, and assured the political support of immigrant and urban labor, the aged and welfare recipients. Racial and religious minorities were also patronized.
 &
   Government relief and other social program funds were directed towards achieving the political ends of the Democratic party. Kennedy sets forth the accomplishments, difficulties, and corruption of the major work relief programs.
 &

The "New Constitutional Order:" 

 

 

FDR concentrated on redistribution of economic wealth, since he accepted the Marxist stupidity that "The era of economic growth has ended."

  Government industrial policy (albeit not by that name, of course) was a primary focus of the New Deal. "--- [T]he very heart of the New Deal is the principle of concerted action under government supervision," explained the chief of the National Recovery Administration. Kennedy provides a fine review of the difficulties, inefficiencies, and absurdities of these government administered economic arrangements.
 &
  FDR broadly applied "competition controlling remedies" in agriculture, airlines, trucking, telephones, radio, and retail pricing, while his antitrust enforcers strenuously attacked many private efforts to arrange shelter from the ordeal of competition - and often simply harassed certain business sectors. His goal was to construct "a new constitutional order" to control and more equitably distribute the benefits of economic capacity.
 &
  This was based on his revealingly stupid Marxist-like belief that economic overcapacity was an inherent result of capitalist expansion. The "mature economy" or "stagnationist" stupidities were broadly accepted. "The era of economic growth has ended," FDR proclaimed.
 &

 Embracing isolationism:

 

 

 

 

 

The New Deal approach condemned the nation to five more years of grinding Depression.

   The deficit spending and price fixing strategies of FDR's first 100 days programs could not be financed without inflation. This forced FDR to rely on substantial expansion of the money supply and to reject monetary stabilization. He had to refuse to take part in international efforts to stabilize currencies and deal with the vast problems of international finance and trade.
 &
  Instead, FDR proceeded much as Hoover had done - attempting to initiate economic recovery by narrowly focused nationalistic means - but on a much broader scale. His economic experiments, monetary inflation, and budget deficits couldn't be sustained in an interdependent world. This pleased FDR's various constituencies, and pleased the bulk of the electorate - but of course failed to restore economic growth and condemned the nation to five more years of grinding Depression.
 &
  However, the politically untouchable war debt and reparations problems were resolved by the default of the debtors. Thus, only the trade war restraints and subsidies remained to constrain economic recovery. Unfortunately, FDR would make no real progress in unraveling the trade war tariffs until 1938. There were practically no wheat exports for the first five years of the New Deal - dooming to continued Depression the huge agricultural sector of the United States economy. Most other exports remained similarly depressed until 1939. Kennedy misses most of these vital factors.
 &

 Failure to revive economic growth caused vast human misery.

   Congressional isolationists were thus FDR's most natural New Deal allies - something that would haunt him as he strove to take the nation into WW-II on the side of the Allies.
 &
  Kennedy dwells extensively on the vast human misery of an economy that remained largely dysfunctional for a decade. He points out that programs like the Agricultural Adjustment Act and the National Recovery Act "proved most effective not in protecting the 'little fellow,' but in salvaging the bacon of the biggest commercial interests." The first two years of the New Deal provided some spiritual uplift and some relief - but little economic recovery.
 &

 Freedom from fear:

 

 

&

   Kennedy is at his best in portraying the most important personalities of the time - the political considerations at play - the deep and broad roots of isolationism - the conservative opposition in both parties - and the various radical movements.
 &
  Outmaneuvering these forces, FDR pushed his core effort to provide "security" - for labor, the aged, investors, depositors, and financial institutions. He firmly established the popular notion that government not only played a role in - but had a responsibility for - maintaining economic prosperity and the welfare of the citizenry.
 &

 The New Deal legacy:

 

 

 

 

 

 

&

   There is excellent coverage of the birth of industrial unions, the triumph of Keynesian liberalism, the effort to "pack" the Supreme Court, and the forces that brought the New Deal to a halt. Both FDR and the Keynesians - who flocked to his Administration in its second term - suffered from the Marxist "mature economy" stupidity, and its corollary scare over capitalist overproduction and "automation."
 &
  More limited but adequate coverage is provided of the successful and vitally important regulatory efforts to strengthen banking and the securities markets.
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  By the end of WW-II, all the agencies charged with direct economic action - the Civilian Conservation Corps, the Works Progress Administration, the National Youth Administration, the National Resources Planning Board - were gone. However, this still left the regulatory efforts at improving competition and the financial system, credit allocation agencies, a variety of redistributionist and social insurance programs, extensive public works and environmental measures, various initiatives designed to spread the availability of electricity, and the new labor laws as an enduring New Deal legacy.

  Above all - then as today - progressives welcomed economic hard times - viewing the Great Depression as a marvelous opportunity to promote their various and broad agenda. Some New Dealers even feared the end of the Depression.

The American People

 Accentuating the negative:

 

Kennedy clearly prefers to emphasize the one/third of the glass that was relatively empty over the two/thirds of the glass that capitalism was filling with unprecedented prosperity.

 

 

&

  Kennedy chooses to accentuate the negative throughout this book - even in his portrayal of the 1920s and WW-II.
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  In the 1920s, unskilled and semiskilled workers - coming in their many millions to the cities as migrants from abroad or as displaced farm workers - faced harsh and uncertain economic conditions, that Kennedy sets forth at considerable length.
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  Kennedy notes that workers in industry earned four times as much as when they worked on the farms, and that the real wages of industrial workers had increased 25 percent during the decade of the 1920s. He perforce notes the "democratic society whose wealth was nearly as widely diffused as its formal political power." Nevertheless, in much of the first half of this book, he chooses to dwell on the difficulties of the least fortunate third of the American people.
 &
  That capitalism has never been an utopian system - that it is definitely not egalitarian - and that it provides no magic wand to provide instant abundance - has always provided its ideological foes with an easy target for criticism. All they have to do is ignore the fact that no other system has done nearly as well. It is a truism that the great abundance of the end of the 20th century had not yet arrived by the 1920s - but it was getting there.
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 Except for a few paragraphs, Kennedy totally ignores middle America.

   Somewhat belying the tone of his coverage of the 1920s, Kennedy draws on the most thorough contemporary study of economic conditions at the end of the 1920s. He provides a similar short segment about the unionized industrial worker at the end of the Great Depression decade, and another about middle America after WW-II.
 &
  These short segments are about all you will find concerning the impact of the Great Depression on middle America in this book.
 &
  The study presents an average worker as male, not quite 27 years of age, born in a farm house without plumbing or electricity, receiving some high school education, and moving to the city in the 1920s where he obtained an apartment with plumbing and electricity, and enjoyed such creature comforts by the end of the 1920s as a radio and an automobile (bought on the installment plan), and one day per week off. Where an automobile cost two years' wages before WW-I, the magic of capitalism - of which Kennedy explains nothing -  had brought the cost down to just three months' wages in 1929. The magic of capitalism also provided him with "an amazing variety of new products," including canned foods, washing machines, refrigerators, synthetic fabrics, telephones, and movies.
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  Despite occasional layoffs, he could support a stay-at-home wife with child, had enough money in the bank to cover some future short layoff, and was contemplating the purchase of a home. He did all this while working a 48 hour week, at just one job.
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  Not bad, for the 1920s.
 &

 After 5 years of New Deal programs, nearly half of all white families lived in poverty, as did almost 90 percent of black families, and one in seven workers remained unemployed.

  At the end of the Depression decade - after half a decade of New Deal programs - nearly half of all white families lived in poverty, as did almost 90 percent of black families, and one in seven workers remained unemployed.
 &
  By 1950, all that had changed. The average American was now a 30 year old woman who had held a clerical job during the war. She had married a veteran who went to school on the GI Bill. He now had an income of almost $3,500 per year and rising. This was sufficient to buy a suburban tract home, support a stay-at-home wife and three children, and enjoy numerous creature comforts, including a new television.
 &

 

   Omitted from Kennedy's account is the experience of the majority of Americans during the Great Depression - those who struggled and managed to get through the Great Depression without government assistance or with just brief periods of government assistance.
 &
  This being a book about the Great Depression and the New Deal, perhaps it is fitting to concentrate on the destitute. Of course, this is also the Politically Correct emphasis. Unfortunately, it omits the experiences of two thirds of the American people.
 &

 

   Also absent is the history of business during these difficult times. The story of how businesses and businessmen survived the ordeal - managed to cope with the anti-business attitudes and regulatory harassment that Kennedy does note, and maintained enough productive capacity to provide the vast output that Kennedy highlights as playing the dominant role in the winning of WW-II, is not presented in this book. After ten years of Depression, this productive capacity just appears - like magic.
 &
  You will also not find developments in the arts and sciences, except for some brief notations concerning New Deal patronage.

The Economic Failure of the New Deal

 The Keynesian myth of WW-II deficit spending:

 

They didn't spend enough.

   The failure of New Deal efforts to end the Great Depression is explained by Kennedy by accepting yet another left wing myth. There simply wasn't enough money spent on the program to do the job. Revealingly, he accepts the standard Keynesian view.

  "The huge expenditures for weaponry clinched the Keynesian doctrine that government spending could underwrite prosperity and inaugurated a quarter century of the most robust economic growth in the nation's history."

 To their great credit, Keynes and the Keynesians played a major role in the efforts to end the trade war and facilitate world trade after WW-II - and in this manner greatly contributed to post WW-II prosperity. They were in no doubt about the importance of these matters.

  • The elimination by default of WW-I war debts and reparations obligations is ignored - and the vast post WW-II expansion of world trade - facilitated by the ending of the trade war and the development of a variety of international financial institutions - is mentioned just in passing in the Epilogue.

  By1937, the New Deal had failed. The FDR presidency was saved by WW-II spending - by the European nations. In September, 1939, U.S. exports once again rose as the European nations frantically rearmed - leading the nation out of its Depression depths even before its own rearmament and entry into the war. But trade war mentality wouldn't end until the war freed the U.S. temporarily from European competition and paved the way for post WW-II trade liberalization.
 &
  Keynes and the Keynesians were in no doubt about the importance of these matters. To their great credit, they played a major role in the efforts to end the trade war and facilitate world trade after WW-II - and in this manner greatly contributed to post WW-II prosperity.

  • Ignored is the 50 percent loss of purchasing power (real inflation) caused by those wartime expenditures.

  Price inflation was temporarily suppressed by price controls. The real loss of purchasing power was thus hidden by simply breaking the ruler. Depending on the starting date, simplistic measures of price inflation under price controls have ranged from just 4 percent to the 28 percent figure used by Kennedy. However, the almost 50 percent surge in prices immediately after the elimination of price controls revealed that inflation had already accelerated to about 20 percent per year in 1945 - after just four years of wartime expenditures.

  • Ignored is the post WW-II slow expenditure of the huge hoard of gold and hard currency reserves held by the U.S. at the end of WW-II.

  The U.S. had two thirds of all the world's gold reserves at the end of WW-II. When that was substantially expended, the experiment in Keynesian economics turned into the vicious business cycle swings and double digit miseries of the 1970s.

The Struggle to Overcome Isolationism

 Political and diplomatic history:
  With diplomatic and political history, Kennedy is clearly on firmer ground than with economic or military history. Thus, his coverage of WW-II excels in its portrayal of the major personalities and the broad currents of domestic and international political strategy.
 &

 Kennedy portrays an increasingly determined and wily FDR, acting as Commander In Chief, making the key decisions to come to Britain's aid.

   He starts with the complex wrestling match which FDR had to fight against the powerful isolationist sentiment in the U.S. FDR now reaped the whirlwind for his catering to isolationist sentiment in the early days of his Administration. In Congress, many of his New Deal adversaries became his internationalist allies as war approached - and many of his New Deal allies became his isolationist adversaries.
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  Stuck with the political necessity of demonstrating determined neutrality, FDR perforce became perhaps a determining factor in undermining French and English resolve (such as it was) to oppose Hitler when Germany was still weak. Kennedy shows how FDR thus played a key role in the shameful diplomatic history leading up to WW-II.
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  But then Kennedy portrays an increasingly determined and wily FDR - acting as Commander In Chief - making the key decisions to come to Britain's aid. He sets forth the great military and political risks involved in those decisions, and the political battles that had to be fought.
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  Competently covering the development of Anglo-American war strategy, Kennedy convincingly dispatches speculation that FDR intentionally staked out the Pacific Fleet as a sacrificial lamb to provoke a Japanese attack.

  For Part II of this Book Review, covering portrayal of WW-II, See, Freedom from Fear II.

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Copyright 2001 Daniel Blatt