Are We Destined to Repeat the Mistakes of 1937?

Fascinating piece by Jim Jubak yesterday: “Will US Repeat Mistakes of 1937?” The argument here, and I believe he’s right, is that the current economic recovery depends on all the massive government stimulus. If the government thinks the recession is ending and recovery is on the way and starts to remove all its stimulus, the economy could very well fall back into recession. That’s what happened in 1937, according to Jubak:

1937 was the year, students of the Great Depression know, that everyone from the president on down got so confident that the bad times were over that they tipped the country back from recovery to depression.

…..

What happened? Buoyed by the economic numbers and a landslide in the 1936 election — Franklin D. Roosevelt had defeated Republican Alf Landon of Kansas by an Electoral College vote of 523 to 8 — the Roosevelt administration declared victory over the Great Depression.

…..

In 1937, the Roosevelt administration and the Federal Reserve moved to reverse many of the extraordinary measures they’d taken to fight the Depression. In 1937, the federal deficit was cut to $2.5 billion from the previous year’s $5.5 billion as Roosevelt and Congress slashed spending by 18%. In 1938, spending dropped still further, 10% down from the level of 1937.

And the annual deficit just about vanished. The government ran an almost-balanced budget that year with a deficit of a mere $100 million.

The Federal Reserve moved in the same direction. After pursuing policies that had resulted in an average 11% annual increase in the money supply in the previous four years, the Fed reversed course at the beginning of 1937 and began to contract the money supply, raising reserve requirements twice, the second time in the spring.

Comments

[sethmcs]

I don't think we will make the mistakes of 1937. We are more likely to make the mistakes of 1975.

2009 Sep 24 01:51 AM

[aussiereader4]

Buoyed by the economic numbers. Numbers that were created by their own stimulus. We all know how this ended; Poland, Pearl Harbour, Overlord and others.

The challenge, what are the alternatives? I challenge any reader to come up with a better strategy than Bernanke et al. Just saying we need a free market is inadequate.

2009 Sep 24 05:00 AM

[Mansoor H. Khan]

Let me know what you think about this idea as an answer to your challenge?

Please follow link:

seekingalpha.com/artic...

On Sep 24 05:00 AM aussiereader4 wrote:

> Buoyed by the economic numbers. Numbers that were created by their
> own stimulus. We all know how this ended; Poland, Pearl Harbour,
> Overlord and others.
>
> The challenge, what are the alternatives? I challenge any reader
> to come up with a better strategy than Bernanke et al. Just saying
> we need a free market is inadequate.

2009 Sep 24 07:38 AM

[Charlie Price]

I suggest that people pay more attention to what Bernanke says. You might disagree with him, but listen to him - he has more power than you. The one thing we will not do is repeat the mistakes of 1937.

2009 Sep 24 08:36 AM

[mbkelly75]

We will probably simply make brand-new mistakes as opposed to repeating the old ones. That is the way it usually works, in general, anyway.
The bigger question for individual investors is "What to do about it?" A long standing bit of wisdom is that you can not fight the Fed. So how do you make money from this?
I am doing it the same way it was done in the past and for the same reasons. I am buying solid, dividend-paying stocks with a record of raising dividends for at least 5 years (10 or longer is better). I am putting money into them every month and re-investing the dividends as they come in. Following this during the 30's lead to a 4 year break-even point instead of the 25 years that was required if you did not follow this with your investments. That is a huge difference and when you add in the benefits of dividend growth - with the effect that has on your returns - the lesson is clear to see.

2009 Sep 24 11:42 AM

[Tony Petroski]

Commenter Aussiereader4 (greetings mate) asked: "The challenge, what are the alternatives? I challenge any reader to come up with a better strategy than Bernanke et al. Just saying we need a free market is inadequate."

I'll try:

1) "Just saying we need a free market is inadequate." I agree. But at least a few folks do have to say it. See if any of the leaders of the G-20 say it.

2) Bailing out failed "banking" institutions (since the repeal of Glass-Stegal speculating in commodities and shorting the market into oblivion has been termed "banking) with taxpayer money must cease. Break up the too-big-to-fail institutions ATT-style and then allow the weakest of the bunch to fail. The survivors will be stronger and will get back to the business of banking and out of oil speculation.

3) In order to have more employees, you need to sweeten the deal for employers. You and I can quibble about whether the rich get richer and the poor get poorer, but the present "deal" isn't sweet enough to entice employers in America, Great Britain, Canada and Australia to hire more people, although the evidence is that employers see China as a sweet deal. Cut corporate tax rates to zero or whatever the present political culture can bear.

4) Allow God to determine whether the planet will be saved or not. At least postpone our involvement in the rising and lowering of the oceans for at least 10 years. Don't implement cap and tax.

5) Energy runs the economy and oil, gas, coal and nuclear are the best things going right now. Maybe someday windmills and electric choo-choo trains will be viable, but for now (remember, we are debating whether this is 1937 and we are facing Overlord and Anzio) let's make it easier, not harder for non-Arab suppliers to find and refine oil, burn coal to produce electricity, and take our chances that new nuclear plants won't burn all the way down to China.

6) Don't elect the likes of FDR and Obama.

7) This list is very long and we haven't come to the end of history.

We don't have to go the 1937 route although we already have sent the massive stimuli into orbit. The lesson of 1937 is that at some point the "stimulus" of massive government involvement in the economy has to be paid by years or even decades of stagnation. If this were not so, we could run the printing presses constantly and have perpetual prosperity.

I hope we still have some producers left down under.

2009 Sep 24 11:58 AM

[kebu77]

Don't we have 5 or 6 years to go until we get to the point where we can repeat the mistakes of 1937?

Isn't it still 1931?

2009 Sep 24 12:06 PM

[Glen L.]

@aussiereader: "The challenge, what are the alternatives? I challenge any reader to come up with a better strategy than Bernanke et al. Just saying we need a free market is inadequate. "

(1) There is no better solution than the free market
(2) An idiot throwing darts at a decision board could come up with a better strategy than Bernanke.

Austrian School economist and historian Tom Woods, in his best-selling book "Meltdown", laid out an elegant plan for dealing with the crisis with free market measures. Here's the outline; you'll have to read the book to see the details:

* Let the insolvent firms go bankrupt. Too big to fail is a socialist, not capitalist, concept.

* Abolish Fannie and Freddie

* Stop the bailouts and cut government spending

* End government manipulation and central planning of the money supply

* Audit the Fed, and consider abolishing it.

* Close the Fed's special lending windows.

* End monopoly money; institute a free market in money

The last point is the most important. We need to move not just back to a gold standard, but there should be a competitive market for coins and gold-backed notes produced by private money suppliers. Only when there's a free market in money, with no govt interference, will we have a stable, reliable, and honest money system.

2009 Sep 24 02:24 PM

[THofler]

Did anyone catch the catastrophy of 1933 & 1934 mentioned in the Art Laffer article (WSJ) a few days ago?

In 1933 the gov. forced everyone to turn their gold holdings into the gov. in exchange for currency at a little over $20/oz.; then in '34 devalued the currency to $35/oz in gold terms. Unbelievable.

I'm with Laffer, the depression was made Great by the troika of bad Fed monetary policy, trade protectionism, and crushingly high taxes.

I like Jubak generally, but to suggest that we needed more stimulus (followed by even higher taxes?) in '37 seems nutty.

2009 Sep 25 01:47 AM