The Great Depression versus today's recession?

By Jack H. Knowlan Sr.

Although there are a lot of similarities between the Great Depression (1928-1940) and the current recession, there are also some big differences. I firmly believe that both President Bush and President Obama studied the Hoover and Roosevelt days and tried to use some of their strategies, some of which worked and some of which failed.

The Great Depression actually did not end until just before World War II. Virtually everyone in the United States was either in the military service or employed in "essential industry." Manufacturing productivity was unbelievable. In 1942 we manufactured 18,000 B24 Liberator bombers in five plants of Ford, Douglas and North American. One Ford Willow Run Plant produced 428 planes a month. Bell Aircraft manufactured and delivered 2,397 P38 King Cobra jets to Russia under a Lend Lease program. Now, for some unknown reason, we cannot even produce our own necessities. We import appliances, furniture, cell phones TVs and clothing.

In regard to the World War II production, I will always believe both George H.W. Bush and George W. Bush started wars because it was believed then that wars always boosted the economy.

The things of most interest today are jobs (unemployment) and the top tax rate (deficit spending). The first income tax was ratified by the last state in 1913 when Woodrow Wilson was president. The top rate was 7 percent for more than $500,000. The top rate was raised to 67 percent in 1916 and 77 percent in 1917. During this period until about 1924, the economy soared. Speculators borrowed unregulated money, pushing prices up on houses, land, cars and all manufactured products. The stock market climbed to dazzling heights. People like John D. Rockefeller, Harvey Firestone and J.C. Penney all became millionaires, 75 in 1924 and 207 in 1926. Banks grew fat. Executive salaries ballooned to extravagant levels, causing hyperinflation that destroyed the middle class and led to high unemployment and political turmoil. Sound familiar? Some history does repeat itself.

When Warren Harding died in office in 1923, Calvin Coolidge became president. Like Harding, Coolidge was committed to a nonintervention government. In 1925 he lowered the top income rate to 25 percent. Stock prices mushroomed up 40 percent, and 1,200 mergers resulted in 6,000 independent companies being swallowed up by into 200 corporations. But by 1928 as many as 600 banks a year had failed.

Herbert Hoover became president in 1929, and the depression officially started in August 1929. Inventories were up, consumption was down and the stock market crashed in October 1929. Stock losses $16 billion, and 50 percent of Americans were below subsistence level. The Federal Reserve lowered interest rates from 7 percent to 4 percent and added some money (stimulus) to the economy. But banks continued to fail (10,000, 40 percent since 1924), and depositors lost over $2 billion dollars. Unemployment rose to 27.6 percent. I firmly believe unemployment may reach this level again if corporations keep laying off their employees instead of keeping them all on and lowering their wages.

In 1932 President Franklin Delano Roosevelt said 600 families owned twice as much of the country's wealth as all the rest put together. Compare that to 1 percent of Americans earned 21 percent of the nation's income in 2005, and the entire bottom 50 percent only earned 12.8 percent. Currently 50 percent of our senators are millionaires (not likely from their salary), and 50 percent of households have only a one-month cushion if laid off.

In 1932 Roosevelt and Congress immediately began passing regulatory and recovery bills: the Reconstruction Finance Corp. and the Federal Home Loan Bank. They also raised the top income-tax rate from 25 percent to 63 percent.

Alarmed by Roosevelt's plan to redistribute wealth from the rich to the poor, A group of millionaires led by DuPont and J.P. Morgan tried to hire Gen. Smedley Butler, promising him a 5,000-man army, to overthrow Roosevelt with a military coup and install a fascist (dictator) government. The plot failed when General Butler reported it to Congress.

Although Roosevelt rejected John Maynard Keynes' advice to begin heavy deficit spending, he and Congress (1933-1935) passed dozens of regulatory and recovery (stimulus) laws, some of which were badly needed. Some of the recovery laws were the Civilian Conservation Corps, Public Works Administration and the National Recovery Administration. I remember them well and knew many people who survived because of these programs. The Federal Deposit Insurance Corp. was and still is responsible for depositors not losing their deposits when banks fail. In 1934 Congress passed the much needed Federal Communications Commission and the Securities Exchange Commission, which still exist and are effective when enforced. In 1935 the Rural Electrification Administration helped supply electricity for rural America.

In 1936 unemployment dropped from 24.9 to 20.1 and down to 16.9 in 1939. The top tax rate was raised to 79 percent, and the GNP grew from 7.7 percent to 14.7 percent.

By 1941 the United States borrowed and spent $1 billion to build up our armed forces for World War II. Manufacturing shot up 50 percent, and the depression was over. The U.S. emerged as the world's economic superpower. Deficit spending continued, and by 1945 it was said to be twice the tax income. I wonder what it is now.

It is obvious that the causes of our current recession are similar to the Great Depression, but the results, in my opinion, are going to be much worse and the recovery much slower. Eliminating the tax loopholes on the corporations, raising the top tax limit on the wealthy and some stimulus spending will help but will not end our upcoming depression. All the politicians are yelling, "I'm going to get more jobs back in the United States," but none of them seems to have any foggy idea what is necessary or how to do it.

Getting jobs back means getting manufacturing back, which necessitates being more competitive in the world market. The first mistake companies and corporations made was laying off workers. This increased unemployment, caused house foreclosures and was bad for the economy in general. Instead, they should have kept all their workers on and paid lower wages, low enough to be competitive in production cost. Labor unions should agree to accept lower wages rather than having half their members laid off. Likewise the corporate executives should discontinue paying themselves outrageous salaries and bonuses and put that money back into lowering the cost of production. If they don't, then big government should get involved with some sort of regulation or have a tax incentive for companies or corporations following all the above and getting their manufacturing operation back in the U.S.

Needless to say, the above is not going to be popular with anyone, but with a close analysis they will agree it is the only logical answer to our problem.

Jack H. Knowlan Sr. is a Jackson resident.