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One big birthday that came and went without much fanfare this Fall was the 75th anniversary of the Stock market crash of 1929. In October my class read John Kenneth Galbraith’s THE GREAT CRASH (in French translation). Although it is now itself fifty years old, my students were marvelling at how current it seems. Even after the recurrent history of stock market bubbles and nosedives has been fully revealed, Americans still show little hesitation to believe in a rising market. I do wonder if there is something particular about our national character that encourages people to believe that they can and should be able to get something for nothing.
My students asked how it was that the Democrats were not harping on the dangers of George W. Bush’s plan to have people opt out of Social Security and risk their retirement funds on the stock market. Neither they nor I pretend to any great brilliance in economics, but Galbraith’s description of the 1920s does seem to suggest that placing such funds in the market will fuel a speculative binge in which the market values of stocks, unmatched by rising productivity, will increase. Meanwhile, the lack of sufficient “safe” investments will cause promoters to invest in more chancy schemes.
Speaking of Galbraith, it is interesting that in the debate that Ralph Luker and other have been following on the question of liberal bias and self-selection among historians, it is interesting that the Historical Society, in bemoaning the eclipse of “traditional specializations” (particularly diplomatic, military, and some forms of political history), does not include economic history. In the hands of a gifted writer such as Galbraith or Ron Chernow or Niall Ferguson, economics becomes an indispensable tool for studying social and cultural forces. But perhaps the reality is as Galbraith described it in his years at FORTUNE magazine: Henry Luce, who could not be accused of excessive left-wing bias, hired liberals and leftists from Archibald MacLeish to Dwight Macdonald because, Luce said ruefully, conservatives could not write.
I didn't mean to kill off Galbraith. He served on the War Price Board, pushed for wage and price controls under Nixon (which he adopted), and which turns out to work in the short run (Galbraith is better on the empirical economic front than on theory, or than on his political predictions).
I think it is pretty much accepted by economic historians today that the story of Smoot-Hawley has been overplayed. The main reason is because foreign imports of American goods shrunk at about the same rate as foreign economies, when they should have shrunk faster in response to retaliatory restrictions (if they were efficacious).
Temin, for instance, sees the main causative factor not as speculative investment (the favorite of Marxist historians), but in an overreaction to stock market prices -- which didn't react to deflationary monetary policy, as they continued to climb. It did slow down the real sector though, particularly investment. In other words, the Fed, aiming to reign in specualtion, reigned in investment instead. By the time this was realized, and monetary constriction relaxed, it was like pushing on a string -- it didn't matter how cheap you made money, nobody would borrow it in a shrinking economy with shrinking prices. At least that is what Temin says, or how I understand him, and that's as good as I can do.
On the comparison with Europe, I think it holds, even with France (perhaps, since I don't have my data here) as a counterexample. Take Germany, for instance. In 1930, Germany had 15.3% of the labour force unemployed -- the US only 8.7%. Through 1932 it was Germany 30.1%, US only 23.6%. Roosevelt was elected at the end of 1932. By the end of 1934, it was Germany 14.9% and the US 21.7%. In fact, at no time in Hoover's administration did the US have worse numbers than Germany. And in only one year during Roosevelt's administration did the US not have worse numbers than Germany. Among Hoover's contributions was his suspension of inter-governmental payments, his establishment of the National Credit Association and the Reconstruction Finance Corporation.
Oscar Chamberlain -
12/13/2004
Richard, and most others commenting on the proposed social security reforms have used phrases like "a small portion of forced private savings."
However, this is misleading. What is being proposed is allowing people to invest roughly 30% of the money now put (metaphorically speaking) into their social security fund.
I mention this not because most of the audience here does not understand this--though I will admit with embarrassment that I did not understand until recently that the percentages most people use are related to the individual's total income--but because I'm pretty sure that the majority of Americans do not know this yet either.
Greg James Robinson -
12/13/2004
First, let us not use the past tense in referring to Galbraith. He is still active and published a book this year--phenomenal! Also, THE AFFLUENT SOCIETY has been remarkably influential in making people address the issue of private wealth and public penury. I know that some of Galbraith's more technical ideas were (at least allegedly) quite influential on the Canadian governmnet during the Trudeau years.
Secondly, it is not accurate to say that under Hoover the Depression was milder in the US than elsewhere. France, for example, was not much touched by it until 1931, more than halfway into his tenure in office, and the Depression was at it worst by the end of the Hoover years. Now, one can argue the extent to which Hoover,s own policies were to blame for this. Still, I am at a loss to discover what remarkable performance Hoover turned in to limit the economic crisis during those first years, other than signing the Smoot-Hawley tariff, which was a disaster for international trade.
David Lion Salmanson -
12/13/2004
Richard,
Some remarkably good insights. But forced private savings still encounters the same problems that SSI is designed to fix. Banks fail leaving the government as guarantor of last resort, companies have scandals, too many people cashing in at once artificially drives prices down below real value etc etc. The problems that folks face whose pensions have been picked up by the government because the companies who were responsible for paying them went broke is instructive here. If private investment works, great. If not, the government will get stuck with the tab anyway. I think the long run benefits of social security predictability outweigh the possible benefits of private investment.
Richard Henry Morgan -
12/13/2004
1. Galbraith was a better writer than an economist. There is very nearly nothing he wrote as an economist that has had the slightest effect (except that, in emergencies, price controls work).
2. Kindelberger's book has held up really well.
3. Canada never had, for structural reasons, the bank failures of the US. There's a lesson there. For the most part is has been learned.
4. Hoover's extraordinary performance still gets misconstrued. All through his tenure, the depression remained considerably shallower in the US than in Europe.
5. After 1937 (or was it '39? -- it's been a while since my grad seminar in economic history), the US was headed back south into Depression again, rescued by WWII.
6. The myth persists that advisors had wanted to restrict liquidity. In fact, the opposite is true.
7. For all its real disadvantages of market risk, the advantage of a small portion of forced private savings is that the holders will have a claim on real assets -- they won't be as dependent on the ability or willingness of future generations to tax themselves at higher and higher rates to support a larger and larger retired population.
8. Currently, if you die before retirement age, you have nothing to show for your SS contributions (apart from diminished survivor benefits to a spouse). Because blacks, on average, work more years (even past retirement age) and at a lower wage, and die earlier (collecting a shorter stream of benefits), blacks on average realize a slightly negative return on their SS contributions. This is poorly understood, if at all. And that is the best argument of all for forced private savings -- you don't have to live long enough past retirement age to get a positive return, and to leave something for your children.
Ralph E. Luker -
12/13/2004
Touche', Greg. I should say in defense of The Historical Society that the failure to include it in the list of sub-fields marginalized by history departments and re-affirmed by the Society would, emphatically, include economic history. It was my failure, not The Historical Society's. Having said that, I should also say that I am no longer active in THS, but my inactivity is because of its failures in other respects.
