Analogies to America's 2009 recession

Written in 1982, Paul Johnson's book, Modern Times, in the chapter dedicated to the economy of the 20s and the subsequent Great Depression, contains some chilling similarities to our present recession. Many libertarian thinkers are familiar with this history of events in contrast to the popular myth of evil capitalism being reined in by super-president FDR with oodles of government intervention. I have to say Johnson's history, which is more economics-based than a progressive, moral story of greedy, epicurean individualism, makes a lot more sense and explains why the depression of the thirties lasted much longer than previous depressions which ended in a year or so. It appears we have learned nothing, but then most peope are still stuck on the myth of FDR and the Great Depression. In the tradition of Rothbard and Friedman, Johnson presents a different history.

I would like to quote the whole chapter, but, for brevity's sake, here's a portion of Chapter 7 -- everyone should at least read this chapter of Johnson's book:

It is astonishing that, once margin-trading and investment-trusting took over, the Federal bankers failed to raise interest rates and persisted in cheap money. But many of the bankers had lost their sense of reality by the beginning of 1929. Indeed, they were speculating themselves, often in their own stock. One of the worst offenders was Charles Mitchell (finally indicted for grand larceny in 1938), the Chairman of National City Bank, who, on 1 January 1929, became a director of the Federal Reserve Bank of New York. Mitchell filled the role of Strong, at a cruder level, and kept the boom going through most of 1929. Of course many practices which contributed to the crash, and were made illegal by Congress and the new Securities and Exchange Commission in the 1930s were regarded as acceptable in 1929. The ferocious witch-hunt begun in 1932 by the Senate Committee on Banking and the Currency, which served as a prototype for the witch-hunts of the 1940s and early 1950s actually disclosed little law-breaking. Mitchell was the only major victim and even his case revealed more of the social mores of high finance than actual wickedness. Henry James would have had no complaints; but the Marxist zealots were disappointed. 'Every great crisis', Bagehot remarked, 'reveals the excessive specualtions of many houses which no one before suspected.' The 1929 crash exposed in addition the naviety and ignorance of bankers, businessmen, Wall Street experts and academic economists high and low; it showed they did not understand the sytem they had been so confidantly manipulating. They had tried to substitute their own well-meaning policies for what Adam Smith called the 'the invisible hand' of the market and they had wrought disaster. Far from demonstrating, as Keynes and his school later argued -- at the time Keynes failed to predict either the crash or the extent and duration of the Depression -- the dangers of a self-regulating economy, the degringolade indicated the opposite: the risks of ill-informed meddling.

Johnson lays out the events before and after The Great Depression to present the case that social engineering by politicians and their corporate partners was the main cause of the Depression, not capitalism. Like today, the incentives presented by the government did cause greed and irrational exuberance among the sanest of people, but contrary to the popular version of the Roaring Twenties, where greed and immorality ran rampant, in actuality the twenties were a period of widespread wealth generation that reached all levels of society -- it was a time of prosperity and innovation. Yet, even under Harding and Coolidge, who believed a government that did the least was the best, there was still the belief that tariffs and money manipulation were the way to go rather than allow interest rates to follow the natural path of the market -- they implemented monetary (through the recently created Fedral Reserve) and trade policies they thought helped workers and promoted prosperity at home, but what they were doing was interfering with capitalism and setting up the foundation for the Depression -- it only took the literal engineer, Hoover, to apply his social engineering to the country to blow the Depression wide open and set the stage for FDR and subsequent long-lasting disaster.

I will use Johnson's chapter to write several posts, so as not to go on too long in any one post, but Chapter 7 should be required reading for every student of history or anyone troubled and confused by our present crisis -- I can't really do justice to Johnson's writing on this topic, so, if you get a chance, read it. He wrote this book over twenty years before our recession -- it's scary how the same things are happening again, and those sounding the alarm are being ignored by the political class which is going full-speed ahead with grand social-engineering schemes as if history means nothing when you have the best and brightest at the helm.