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Does the U.S. face Great Depression II?

— Photo: AP

History repeating itself?: Re-enacting a scene of boys selling apples during the Great Depression, a teenager stands in front of the New York Stock Exchange.

“They have waited until something has cracked and then at the last moment have sought to prevent total collapse.”

Those words, which could so easily have come from one of the congressional representatives who this week voted down the proposed federal bail-out of the American banking industry, were spoken by Franklin D. Roosevelt in 1932.

A precipitous collapse in stock market prices, millions defaulting on mortgage repayments, an unpopular president blamed for neglecting the plight of ordinary Americans. As the current economic crisis in the U.S. unfolds, many people are asking whether this is history repeating itself. Are we witnessing a rerun of the stock market crash and subsequent Great Depression? What lessons can be, or should have been, learned from that earlier national emergency?

“The past,” once observed Pulitzer prizewinning author Robert Penn Warren, “is always a rebuke to the present.” And there are certainly clear parallels between the present crisis and events of eight decades ago. In both cases, the economic collapse came after a period of political dominance by the Republican Party. The 1920s saw three successive Republican politicians elected to the White House: Warren G. Harding, Calvin Coolidge and Herbert Hoover. These administrations shared a fervent commitment to laissez faire capitalism, encouraging growth through tax cuts, low interest rates and minimum business regulation. Coolidge encapsulated Republican faith in the free market economy in the aphoristic observation: “The business of America is business.”

Similarly, the last three decades have been a period of renewed Republican Party hegemony, interrupted only by the two terms that Bill Clinton served as president. Successive administrations have championed the growth of commerce unfettered by government regulation. Even Clinton, a political centrist who abandoned many of the progressive legacies of Democratic presidents such as Roosevelt and Lyndon B. Johnson, did little to control the excesses of Wall Street.

In the 1920s, as now, political leaders created the conditions that precipitated economic crisis. In both instances, a lack of effective regulatory oversight fostered a climate of reckless speculation on the stock market. And just like the federal government in 1929, the current administration failed to see the emergency coming.

“I have no fears for the future of our country,” boasted Hoover at his inaugural address in March 1929. “It is bright with hope. We shall soon be in sight of the day when, God willing, poverty will be banished from this nation.” Seven months later, the stock market crash precipitated an economic crisis unprecedented in the nation’s history.

In a speech last November, George Bush emphasised the continuing growth of the American economy. “Sure, there’s some challenges facing us,” he complacently suggested, “but the underpinnings of our economy are strong.” Even as warnings that the country was heading towards disaster became louder, the President emphasised his administration was “on top of the situation.” Given his earlier optimism, the recent televised address in which Bush predicted that the U.S. faces a “long and painful recession” was a painful admission of his lack of foresight.

The American economy still has a long way to fall before it reaches the depths of the Great Depression, of course. The U.S. is technically still not even in a recession, and only just over 6 per cent of American workers are out of a job. The economic situation is nonetheless hurting many ordinary Americans who are losing their jobs, finding themselves with little disposable income and defaulting on mortgage loans.

It is also important to recall that Americans did not experience the worst excesses of the Great Depression until some years after the stock market crash. We may not yet have felt the full force of the current crisis.

The suffering that followed the crash of 1929 was appalling. From 1929 to 1933, farm income halved, industrial production stood at 40 per cent of capacity and unemployment rose to one in four Americans. Hungry men and women lined the streets for their next meal from the local soup kitchen, homeless people huddled in hastily erected shantytowns on the outskirts of many cities, and thousands hitched rides on railroad cars in search of a job.

The collapse of the agricultural economy drove farmers from the land. Dust storms and evictions displaced more than a million rural labourers, whose plight John Steinbeck portrayed in The Grapes of Wrath. Industrial and manufacturing workers fared no better. The coal and textile industries were first to suffer, but were soon followed by other sectors of the economy. Homeless families in Arkansas huddled in caves; others in California found refuge in sewers. “We saw want and despair walking the streets,” observed a Chicago social worker, “and our friends, sensible, thrifty families, reduced to poverty.” The American birth rate fell to its lowest level while the suicide rate reached its highest.

The anguish of the American people is captured in the thousands of letters they wrote to the White House in search of help. One woman from New York State sent a letter to Eleanor Roosevelt in which she asked for a loan to buy clothes for her new baby. “Please, Mrs. Roosevelt,” she begged, “I do not want charity, only a chance from someone who will trust me until we can get enough money to repay the amount spent for the things we need.” As proof of her sincerity, she enclosed in the envelope two of her dearest possessions, a ring worn by her mother and another given to her as a gift by her husband.

For African Americans things were even bleaker. The collapse of the cotton market led to the displacement of thousands of black sharecroppers in the southern states. Many migrated to urban areas but racial discrimination restricted their access to jobs and government relief programmes.

Once again, minorities, still overrepresented among America’s poor, have borne the brunt of the economic burden that now afflicts Americans. Sub-prime mortgage lenders aggressively targeted minorities who otherwise were unable to afford their own homes. According to the Harvard University’s Joint Centre for Housing Studies, 55 per cent of African Americans and 45 per cent of Latinos who became homeowners in 2005 did so through sub-prime mortgages, compared with only 17 per cent of whites.

The sub-prime mortgage crisis has hit minorities hard, with many suffering foreclosures. Last year, the National Association for the Advancement of Coloured People filed a lawsuit against sub-prime mortgage lenders it accuses of “institutionalised racism” because of their predatory behaviour. Janet Murguia, president of the National Council of La Raza, a Latino civil rights organisation, similarly affirms that high-interest loans to poorer minorities are “eroding the hard-earned wealth our communities spent decades fighting for.”

In 1929, there were few safety nets to catch people whose livelihoods collapsed. With his New Deal, Roosevelt revolutionised the role of government as a provider for the dispossessed through the introduction of such measures as the minimum wage, unemployment relief and aid to dependent children. Despite swingeing cuts to the provision of welfare in recent times, there are now far greater protections in place for ordinary people than in the 1930s.

Perhaps as a result, there are also no indications that the current economic crisis is tearing at the social fabric of the U.S. in the same way as the Great Depression. Demonstrations by unemployed and homeless people shook many cities during the 1930s. Fears grew that a fascist demagogue could use grassroots unrest as a means to seize power in Washington, a scenario enacted in Sinclair Lewis’ satirical novel It Can’t Happen Here. While the U.S. is not about to become a fascist dictatorship, there is a possibility of more serious social unrest should the crisis deepen further. The stakes are high. Mr. Bush’s handling of the economy may prove decisive to this year’s presidential election, as was true in 1932. The dour President Hoover appeared to many Americans uncaring and unable to appreciate the scale of the problem that beset the country.

In 1930, Hoover introduced higher trade tariffs to protect American manufacturers from foreign competition. The Smoot-Hawley Act led to a protectionist war between the U.S. and other countries. American exports and imports fell sharply, crippling businesses, which laid off workers in ever higher numbers. The president became so unpopular that the shantytowns erected by homeless people became known as “Hoovervilles” and an empty pocket turned inside out a “Hoover flag.”

The public perception that Hoover had failed either to avert or remedy the economic crisis led to his resounding defeat to Democratic challenger Franklin Roosevelt in the presidential election of 1932. Roosevelt won a landslide victory with 22.8 million votes to Hoover’s 15.7 million. How the U.S. government acts now is very important, but while Mr. Bush is unlikely to repeat Hoover’s mistakes, so far he has lacked the vision of Roosevelt.

One of the most striking contrasts between the past and present economic crises concerns presidential rhetoric. “The only thing we have to fear,” proclaimed Roosevelt in his inaugural address of January 1932, “is fear itself.” The Great Depression had a profound psychological as well as material impact on Americans, shattering their individual and collective self-confidence. In times of unprecedented trouble, Roosevelt sought to restore public optimism through his regular radio broadcasts, the “fireside chats” in which he presented himself as not only a politician but a personal friend to ordinary Americans.

In sharp contrast, the address that Mr. Bush delivered to rally support for the bailout plan exploited public fears. — © Guardian Newspapers Limited, 2008

(NOTE: Clive Webb is reader in American history at the University of Sussex, England .)

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