Thursday, April 03, 2008

Was the Depression the Perfect Storm?

The Economic Libertarians, led by the Wall Street Journal's editorial page scriveners, have blamed Smoot-Hawley tariffs for the Depression for years. The fact that Smoot Hawley was passed AFTER the Crash of 1929 (the precipitator of the Depression) may or may not be significant, but as we pointed out earlier, blaming Smoot-Hawley has a fact-challenged genesis.

According to the U.S. Statistical Abstract, the effective tariff rate was 13.5% in 1929 and 19.8% in 1933. From 1821 through 1900 the United States averaged 29.7% effective tariff rates and peaked in 1830 at 57.3%, dwarfing the Smoot-Hawley rate, in effect, the WSJ and their sheeple believe that LESS tariffs (Smoot-Hawley) were more destructive than MORE tariffs during the period 1821-1900. Uh-huh. Sorta like more rain causes less floods, I guess.

In any case, the WSJ now advises that perhaps Hooverian taxes were also problematic:

...Two years later, [1932] amid a bad recession, he [Hoover] undid the Calvin Coolidge-Andrew Mellon tax cuts, raising the top marginal income-tax rate to 63% from 25%. The recession became a Depression

Hmmmmm. My cite was from an article in which Milton Friedman states that it was the FED'S actions which caused the Depression.

The [1929] recession was an ordinary business cycle. We had repeated recessions over hundreds of years, but what converted [this one] into a major depression was bad monetary policy.

...what happened is that [the Federal Reserve] followed policies which led to a decline in the quantity of money by a third. For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing from beginning to end, with millions of people having their savings essentially washed out, that decline was utterly unnecessary

All this makes the case for a "perfect storm" rather than any individual element, whether tariffs, taxes, or monetary policy.

About time that the WSJ admits it, too.

1 comment:

M.Z. said...

It appears on the tax side you have a similar issue as with the tarrifs. Taxable income in 1921 was taxed at 73% over $1 mil. In 1931, income over $100K was taxed at 25%. In 1932, income over $1 mil was taxed at 63%. While that jump sounds impressive, for a person making $1.2 mil/yr, their taxes only increased by roughly $70K. It's not check scratch, but less than 1% of $1.2 mil in absolute terms. One wonders how many were making in excess of $1 mil at that time.