Is the country headed toward a second Great Depression? The economic outlook amid the covid-19 pandemic is certainly grim. More than 17 million workers have applied for unemployment benefits in the past four weeks. And as the economic downturn deepens, some forecasters are predicting unemployment levels as high as 30 percent, well above even the highest levels of the 1930s, when, for a decade, more than 1 in 10 workers was unemployed. The only way to make it through a similar disaster now, the thinking goes, may be to accept one government rescue after another — just as Americans in the 1930s did.
That thinking, however, is flawed. A record unemployment number does not a depression make. Nor is aggressive policy intervention likely to help avert that fate. The downturn that began in 1929 was transformed into a Great Depression by a series of poor policy decisions. If that history holds a lesson for recovering from the current crisis, it is this: What’s needed are fewer government rescues, not more.
The story of the avoidable Depression begins in September 1929. The Dow Jones industrial average touched the then-astronomical high of 381, more than due for a correction. That correction came during the infamous Great Crash the following month, taking the Dow Jones down to 306 and then 250, just 66 percent of its peak value. Still, by April 1930, the Dow Jones was nosing up toward 300, about 20 percent off the original high. Unemployment stood at 6 or 7 percent — hardly a number to cheer about, but within the normal range.
What then caused the market to plunge again and unemployment to expand? Part of the answer can be traced to foreign stock markets, as well as a worldwide tightening of credit. But a major cause was a series of policy mistakes made by the administration of President Herbert Hoover.
Rather than accept, as his predecessors had, that businesses would lower wages in hard times — as businesses are doing right now — Hoover used statutes and simple browbeating to force companies to sustain high wages. The theory was that workers would then stimulate the economy by spending more. Chastened businesses complied, and simply offset the high price of labor by rehiring fewer workers.
Hoover turned to protectionism in an effort to shield the fragile U.S. job market, signing the Smoot-Hawley Tariff Act. Other nations retaliated with tariffs of their own, suppressing exports and imports, dooming international commerce as a potential instrument of economic recovery. Finally, Hoover piled more weight on businesses’ shoulders with a large tax increase.
Such heavy-handed policy decisions, combined with the errors of foreign governments and central banks, triggered bank failures around the world. The Dow Jones plummeted, hitting 41.22 in July 1932, an astonishing decline of nearly 90 percent from the 1929 high. Unemployment hit the dramatic 25 percent rate that people recall to this day.
This deep crisis was what Hoover’s successor, Franklin D. Roosevelt, sought to address when he called for “bold persistent experimentation” through his own recovery program: the New Deal. Some components of the New Deal were necessary: the establishment of the Securities and Exchange Commission, the temporary jobs programs that brought hope to desperate unemployed workers. But major features of the New Deal proved counterproductive. The National Recovery Act of 1933 mandated, in effect, a federal takeover of the industrial sector. The National Labor Relations Act, also known as the Wagner Act, in 1935, established protections for labor unions far stronger than those on the books today. The combined effect was to further disincentivize rehiring. Unemployment rates of 10 percent or more became the new normal.
By the mid-1930s, it appeared full recovery might finally be around the corner. But Roosevelt’s administration and the Federal Reserve blundered into bad monetary policy. With gold flowing from overseas investors seeking a haven in the United States, Treasury Secretary Henry Morgenthau Jr. became concerned about the influx feeding inflation. Working in the opposite direction of the president, who wanted monetary stimulus, Morgenthau pursued a “sterilization” campaign, using the treasury’s balance at the Federal Reserve to sell bonds and shrink money in circulation. Unemployment moved toward 20 percent again.
As policymakers responding to the coronavirus pandemic try to avoid another depression, they would do well to recall the history of the first. In dire times, government can provide necessary and helpful humanitarian support. But it should not take over entire industries, dramatically increase taxes, close borders to trade or fiddle with monetary policy. Those attempted rescues can just compound the damage. A covid-19 depression is less likely to be caused by a single virus than by misguided policy “cures.”
Amity Shlaes chairs the board of the Calvin Coolidge Presidential Foundation and is the author of “The Forgotten Man: A New History of the Great Depression.”