Hi Mark - I posted the material I was talking about on SI:
Message 16233562
I am going to scan more later, but Chapter V was the one that answered the questions I had about global capital movements. The book is perfect for me right now because it was written in 1932, so the events were fresh in the author's mind, but he did not know that the Great Depression would continue for almost a decade, nor did he know that 1933 would be worse than 1932. People who wrote about the Great Depression later tried to give more of an overview, but right now I am focusing on how it started.
The article you linked from the George Mason Department of Economics is pretty good - written by a graduate student, apparently - but it gives an in-depth analysis of effects, not causes, I think. Although effects are also causes, and have effects of their own.
The cause that Dr. Hansen describes is much larger. To put it into a nutshell (I am also expanding a bit):
1. From 1914-1928, private citizens of the United States loaned $23 billion abroad.
2. In 1921, 1922, and 1929, the US enacted a series of ever more restrictive tariffs. (Smoot-Hawley was actually signed into law 1930, but the bill was debated and amended in the House and Senate in 1929. The Great Crash started the day after newspapers reported that the Smoot-Hawley tariff was likely to be enacted - October 28, 1929, and the Great Crash was October 29, 1929 - now I understand why and will explain below.)
3. Foreign borrowers were unable to pay off the US loans using dollars gained through trade because of the tariffs, but were able to continue paying US loans using dollars because US lenders continued to make new loans, so they used the new money to pay off the old money.
4. In 1928, it became more lucrative to either put the money into the stock market, or loan it for call money (broker's loans for purchases of stock on margin) so US investors stopped loaning money abroad.
5. Most of the world's gold flowed into the US (and France, which went back onto the gold standard in 1926-1928 at a greatly devalued rate - France deliberately accumulated and hoarded gold, the US did not) According to Hansen, this concentration of gold in the US was due to debtors repaying their loans with gold because they were unable to repay them with dollars or trade. They were repaying from their capital, not their surplus.
6. Global commodity prices started to decline, slowly at first, more rapidly later. According to Hansen, this was caused by the concentration of gold in the US.
7. In Chapter VI (not posted yet) Hansen says that depressions last three to four times longer when price trends are downward than when they are upward.
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What does Hansen tell us that is of value today?
I think the lesson he is teaching is one for people in Japan and China to read.
The US is now a debtor nation, not a creditor nation. Hansen says that this is the normal state of affairs for an advanced industrialized nation, because less advanced nations sell us raw materials and unfinished goods. "In point of fact advanced industrial nations, instead of exporting a net surplus of goods, normally import a net surplus year in and year out. With considerable income flowing in from their foreign investments, they can and do buy more than they sell." Which is exactly the point El Mat made a couple of days ago.
Further, we no longer have such restrictive tariffs, at least not on a par with the Fordney-McCumber tariff of 1922 and the Smoot-Hawley tariff of 1929. (Mq, please note that I am not saying that the US doesn't have trade restrictions, just that the ones we have now are not on a par with Fordney-McCumber and Smoot-Hawley.)
Japan, on the other hand, is a creditor nation, with very prohibitive import restrictions. I wouldn't call China a creditor nation, but it also has very prohibitive import restrictions, and is certainly on its way to becoming a creditor nation. However, Japan is the second largest economy in the world.
Let's see, creditor nation with very prohibitive trade restrictions suffers a lengthy depression - hmmm. Coincidence?
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Why did the news that the Smoot-Hawley tariff was going to pass cause the Great Crash? Because foreigners who needed to repay US loans knew that they would be unable to pay them off using trade, so had to conserve their cash, and smart investors realized that for US manufacturers who relied on imported commodities and goods the cost of doing business just went up by 40%.
You may read people who claim that the Smoot-Hawley tariff wasn't enacted until 1930 so it couldn't have caused the crash. But the New York Times and the Wall Street Journal put news of the Senate debate on the front page above the fold every day that there was news to print. Everyone knew the House wanted to pass the bill, but there was hope that the Senate would not. When the anti-tariff coalition in the Senate fell apart, it was inevitable that the bill would become law. Hoover had said that he wanted to sign it. The New York Times and the Wall Street Journal reported that the coalition had fallen apart on October 28.
Ironically, the reason people thought that Smoot-Hawley was necessary was the ever-declining price of foreign goods and commodities, which, according to Hansen and Benjamin Anderson, was caused by the US simultaneously loaning money abroad and raising tariff barriers - Fordney-McCumber, which people don't get taught in school anymore. I did have a very good American history teacher in 12th grade, so I did memorize "Fordney-McCumber" and "Smoot-Hawley" and regurgitate them back but never really "got it" until now.
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Do I need to keep pointing out that the Crash didn't cause the Depression? Of course, it exacerbated matters. |
