144
Move quickly, be decisive
The early response by the politicians to the onset of the Depression was denial. "In the 1930s, there was a reluctance to intervene … the thought that this was a temporary adjustment," said Bill Waiser, a professor of history at the University of Saskatchewan. The two prime ministers who governed during the Depression era, Mackenzie King and R.B. Bennett, at times used the constitution to argue that unemployment and relief were provincial matters — there was no national unemployment insurance scheme — and Ottawa initially threw only meagre, "temporary" support to them, Prof. Waiser said.
In the United States, there was a similar lack of urgency. Far from the hustling fix-it man that is Henry Paulson, the Treasury Secretary at the time, Andre Mellon, was "a passionate advocate of inaction" on most matters of economic policy, John Kenneth Galbraith wrote in The Great Crash, 1929. Meanwhile, President Herbert Hoover was caught between those who wanted action, and those who held tight to the traditional conservative view that the government should always balance its budget (or at least try) and let economic nature take its course.
And where was the U.S. Federal Reserve during this? It "sat on its hands," said David Laidler, an economic historian from the University of Western Ontario. Nominal interest rates dropped as the contraction took hold, but because of massive deflation — prices dropped 24 per cent between 1929 and 1933 — real interest rates were far too high. Unlike today, the Fed of the 1930s wasn't nearly as aggressive in buying securities in order to get cash into bankers' hands — "pushing liquidity into the system," in central bank jargon. Interest rate policy was wobbly. In 1931, with the economy still in a deep funk, the Reserve Bank of New York raised interest rates twice in the space of a week, to stem an outflow of gold and protect the dollar amid fears the U.S. would drop the gold standard (as the U.K. had just done).
Three unemployed men in March, 1932, start a cooking fire in a vacant lot in New York where they live when they are not searching for work.
Videos
Related Articles
Photogallery
A number of academics who've studied the era — including Ben Bernanke, the world's most important central banker — have said the severity of the downturn was made worse by the Fed's foot-dragging and its blunders. Certainly, the lesson has stuck with Mr. Bernanke. In 2002, at economist Milton Friedman's 90th birthday, he gave a speech in which he joked: "I would like to say to Milton … regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
"The speed of the response today is infinitely faster than it was in the Great Depression," Prof. Laidler said.
Don't demonize government deficits
Jeff Rubin, the chief economist of CIBC World Markets, thinks Canadian politicians have forgotten what governments are meant to do in a recession. The nation was so scarred by the monster deficits of the 1980s and early '90s that neither Liberals nor Conservatives want to add a dime of red ink. "The problem is we've lost sight of the role of fiscal policy over the cycle," Mr. Rubin complained on the same day Finance Minister Jim Flaherty unveiled his budget and pledged, yet again, not to break Ottawa's decade-long streak of surpluses.
Eight months later, the world is in a financial panic and the economic outlook is far worse. Yet Prime Minister Stephen Harper and Liberal leader Stéphane Dion have each stuck to the no-deficit line, with Mr. Dion even saying the Liberals would "never" cause a deficit. As a campaign strategy, it makes sense. No one wants to be attacked as a profligate.
But to stick to that pledge in a deep recession would not only be folly, as Mr. Rubin suggested; it would repeat what was arguably one of the biggest errors of Depression. In both Canada and the U.S., governments were hesitant to try to spend their way out of the problem. It wasn't until 1935 that the Bennett government proposed a Canadian version of the "New Deal" that included unemployment insurance, farm support and a pension scheme.
He was swept aside in the election of that year, but even Mackenzie King took a cautious fiscal approach. The next year, economist John Maynard Keynes published The General Theory of Employment, Interest and Money — which argued for active government intervention to stimulate investment and jobs — and Keynsian economics was born. Still, Ottawa didn't run a deficit that it planned for until 1938.
Mr. Hoover also could not shake the balanced budget orthodoxy. Remarkably, his administration ran a surplus in fiscal 1930, ran a small deficit in 1931 and raised taxes in 1932. Even Franklin Roosevelt wasn't as big a spender as he's often made out to be. "Roosevelt, unlike Hoover, wasn't absolutely wedded to balanced budgets. But he pretty much was," said Robert McElvaine, author of The Great Depression: America, 1929-1941 and a historian at Mississippi's Millsaps College. Before the war, he never ran a deficit larger than $5-billion (U.S.). Pearl Harbor, not the Depression, is what caused radical change in fiscal policy. By 1943, the deficit topped $50-billion. The worrying thing is that the U.S. enters this downturn already in poor fiscal shape, unlike in the 1930s. The public debt has increased from $5.7-trillion to $10.2-trillion during George W. Bush's time in the White House.
