Not Your Grandfather's Depression

by Peter Schiff
October 17, 2008
www.europac.net
The current stock market crash has spurred a vital national debate
about the causes and catalysts of the Great Depression. The dominant
school of thought believes that the stubborn refusal of then president
Herbert Hoover to intervene after the stock market crash of 1929, and
his preference for free market solutions, led directly to the ensuing
decade-long catastrophe. Through this lens, our leaders assure us that
the most recent raft of government measures will prevent another
episode of bread lines, Hoovervilles and pencil salesmen. As usual they
have it completely wrong. In my view, the Depression was created
precisely because Hoover followed the path that our government is now
taking.

When the stock market bubble of the Roaring Twenties
(which was created as a result of the loose monetary policy of the
newly created Federal Reserve) finally popped, Hoover would not allow
market forces to correct the imbalances. His policies were aimed at
propping up unsound businesses, artificially supporting prices,
particularly wages, and providing Federal funds for public works
projects. These moves went well beyond the progressive reforms of Teddy
Roosevelt, and established Hoover as the most interventionist president
ever up to that point. In fact, much of what eventually became the New
Deal had its roots in Hoover's policies.

However, at the time,
there were those who recommended a different course. Andrew Mellon, the
long-serving Secretary of the Treasury whom Hoover had inherited from
the prior two Republican Administrations, was labeled by Hoover as a
"leave it alone isolationist" who wanted to "liquidate labor, liquidate
stocks, liquidate the farmers, and liquidate real estate." Hoover would
have none of it. In fact, during his nomination speech for a potential
second term, Hoover bragged "We determined that we would not follow the
advice of the bitter liquidationists and see the whole body of debtors
of the United States brought to bankruptcy and the savings of our
people brought to destruction."

Hoover chose to ignore the sound
advice of his Treasury Secretary (in contrast to today where the
current Treasury Secretary Henry Paulson is actually leading the charge
over the cliff) and instead used every tool at his disposal to "fix"
the problem. As a result, rather than allowing a recession to run its
course, with healthy and rapid liquidations of the mal-investments
built up during the boom, Hoover inadvertently created what became the
Great Depression.

When Roosevelt took office he continued the
same failed policies only on a grander scale. The magnitude and the
idiocy of many New Deal programs, such as the wage and price setting
National Recovery Administration (NRA), compounded the problems. So
while Mellon's advice would have caused a sharp but relatively brief
economic downturn (which occurred after the Panic of 1907, for
example), the Depression plodded on for nearly a decade until the
country began gearing up for the Second World War.

In an amazing
feat of revisionist history, somehow Hoover's interventionist policies
have been completely forgotten. It is taken as fundamental that his
inaction led to the Depression and Roosevelt's "heroics" got us out.
Unfortunately, since we have learned nothing from history, we are about
to repeat the very mistakes that lead to the most dire economic
circumstance of the last century.

A major difference however, is
that the structure of the U.S economy today is far weaker than it was
in the fall of 1929. Years of reckless consumer borrowing and spending,
and enormous trade and budget deficits have resulted in a hollowed out
industrial base and an unmanageable mountain of debt owed to foreign
creditors. Instead of the support of a strong currency backed by gold,
the public now must deal with a modern Fed free to print as much money
as politicians want. So rather than getting the benefits of falling
consumer prices (as happened during the Depression), consumers today
will contend with much higher consumer prices, even as the economy
contracts.

With Barack Obama now waiting in the wings to
conjure a newer New Deal, far larger than even FDR could have imagined,
and at a time when we cannot even afford the old one, this will not be
your grandfather's Depression. It may be much worse.

For a more
in depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar denominated investments,
read my new book "Crash Proof: How to Profit from the Coming Economic
Collapse."
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