My Term Paper: Black Days Coming (How the New Elite are Recreating the Great Depression)

Sooooo this is what I wrote for my history class. It's not as good or as long as I'd been aiming for, because my files and backup got corrupted so I had to rewrite all but 2 pages from scratch in two days. Please note that because of formatting issues I can't put my actual footnotes in, but they cited everything from the Associated Press to the United States Treasury to Howard Zinn's People's History of the United States and I left the little markers in. Rest assured, I did not make this stuff up. The Nation magazine was particularly invaluable and I encourage you all to go take a look at it.

This is dedicated to my incredible boyfriend Jack, without whom I would have had a complete breakdown and never re-written it.

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When Americans need a reference for the worst of times, they choose the Great Depression. The crash of 1929 and the destitution of the ‘30s represent perhaps the lowest point in American history with respect to living conditions, lack of prosperity, and hopelessness. Iconic images have survived to remind us all of the poverty of the era, but very few people recall anything else. Its origins are most noticeably forgotten, if in fact they were known by ordinary citizens at all. The majority of people, completely trusting of the economy's stability, were caught entirely off-guard when the Stock Market crashed in the last days of October, 1929. Then again, these people did not actually work on Wall Street or in the great financial firms, and did not have access to knowledge of what was actually happening behind the scenes. While most of America saw huge growth and prosperity, much of that was actually a bubble, soaring affluence borne up by excitement over nothing at all. When the bubble burst, and it was revealed that a lot of the money that had kept the economy going was nonexistent, millions of people lost everything they had invested. Some of the reasons for the rampant, unstable growth were valid, like the introduction of affordable motor cars that opened a whole new branch of production. However, the key reasons for the crash were bad policy decisions, lack of regulations, and pure greed. This will sound familiar to anybody who pays attention to economics in the modern age, particularly in America. The conservative administrations in power since Franklin Delano Roosevelt have rebuilt the corporate monster responsible for the Great Depression. In a terrifying revival of the Gilded Age of robber barons, Reagan and the Bushes have brought the country to the brink of a second economic catastrophe, and this time, it will be much, much harder to repair.

In the wake of Black Tuesday, politicians wrangled over whom to blame. Calvin Coolidge balked at taking responsibility, claiming that most causes “had their origin outside of the United States” where the administration could not reach.1 The International Chamber of Commerce cited a host of causes including the fall of silver, Soviet treatment of goods, and a decline in commodity prices.2 Republican congressman Fiorello LaGuardia of New York believed usurious banking practices were the problem,3 but the Democratic Party's official statement tore into failed post-war policies and business monopolies. In a 1932 statement, the party blamed the Coolidge administration for “encouraging the indefensible expansion and contraction of credit for private profit at the expense of the public.”4 Part of the problem was, in fact, poor administration on the federal level; during most of the '20s, a man named Daniel Crissinger was in charge of the Federal Reserve Board as chairman. He had no true credentials for the post, having been General Counsel of an Ohio-based steam shovel company in the past, without any other economic experience whatsoever.5 The director of the Federal Reserve Bank of New York, Charles E. Mitchell, was appointed in January of 1929 and had a personal stake in the booming market which left him disinclined to suppress the violent growth with regulation.6

The principal underlying causes of the unsafe boom, though, were touched upon by President Herbert Hoover, United Mine Workers president John H. Lewis, St. Lewis Post-Dispatch correspondent Charles G. Ross, and state representative William Randolph Hearst.7 Hoover brought attention to the problem of speculation,8 the practice of buying the rights to a certain product in expectation of an increase in price, then selling with no intention of using the product in question for its own sake. Buying and selling stocks for profit is one kind of financial speculation. A more dangerous form, however, evolves when the product is something tangible. Commodities speculation can and does drive the price of that commodity up at incredible rates, making the product unavailable to those who would like to buy it for use. This type of speculation ran rampant in Florida during the mid-1920s in the real estate market. The concept of owning beachfront property in Florida was so appealing to the newly affluent middle class that lots in the state began selling like hotcakes. Speculators bought land, even if it was not on the beach, because it would sell again for twice or three times what they had paid for it, sometimes only days later. People accepted down payments as small as 10% on lots because the buyers would want to sell in “a fortnight.”9 As prices spiraled higher, actually buying the properties to live on became untenable, and even those who had made huge profits by repeatedly buying and selling could not afford to purchase or hold the land. The disillusionment was helped along by hurricanes during 1928. By that year, bank clearings on loans and transactions had fallen to $143 million from over $1 billion in 1925.10

This sort of cycle caused the huge collapse of the market. Buying stocks on margin, a form of trading in which each holder receives the sale profit without any costs of ownership, meant that prices could spiral ever higher without anybody actually having the money to back it. The banks which originally supplied the capital were being loaned to from all around the country because rates of return were so high. The origin of all the capital became lost in the tangle of lending and trading.11 Then, “When prices stopped risingwhen [people capable of buying ran out]then ownership on margin would become meaningless and everyone would want to sell. The market wouldn't level out, it would drop precipitately.”12 And drop it did; lack of consumer confidence in the values of everything from housing to hats resulted in the enormous crash. The process had, in fact, caused numerous small recessions and depressions before 1929, yet nothing was ever done to curb the practice.13

Other serious financial issues, raised by Lewis, Ross, and Hearst, concerned the disproportion between corporate profits and the rest of the people in the country. These were what caused widespread poverty after the initial collapse of the stock market. Lewis blamed the owners of corporations, saying that “a horde of small-time leaders in industry and finance looted the purse of the population,”14 referring to the astounding gap between the top 0.01% of Americans and the bottom 90%. In 1928, the top hundredth earned 892 times as much as the rest of the country.15 Ross commented in a Pulitzer-Prize-winning article in 1932 that “the wealth created by the machine has gone, in appalling proportion, to the owners of the machine.”16 Hearst took the analysis a step further when he declared that “if profits had been distributed in wages, prosperity would have been maintained and increased.”17

This entire situation has been remade in the context of the 20th and 21st centuries. For about twenty-five years, largely conservative administrations have worked away the underpinnings of Roosevelt's New Deal and the regulations that helped the American economy stabilize. Rather than increasing power to supervising bodies, policy has favored market discipline, which has failed to keep the country running smoothly.18 While regulation does raise the question of who is to regulate the regulators,19 lack of oversight causes worse problems. Calvin Coolidge, whose administration set up the environment that spawned the Depression, based his economic policy on noninterference and tax cuts.20 In the 1980s, Ronald Reagan's “Reaganomics” were based on the same ideas. The regulations on businesses were halved during his term, and the government lost $750 billion to tax cuts while increasing defense spending, a move that sent national debt through the roof even as corporate profits soared.21 Reagan's successor George Bush increased that debt, his Democratic successor Bill Clinton created a budget surplus―and then George W. Bush came along. In his eight years in office the nation has gone from a surplus to over nine and a half trillion dollars in the hole.22

Terrifyingly enough, the government is still spending more than what it gains in taxes, and not just on wars that traditionally were funded by increased tax rates.23 The regulations Reagan did away with have not been restored. Bush has continued to follow the “trickle-down” hypothesis, increasing regulation in the wrong sectors that put the majority of burden on small businesses, promoting speculation in the oil market, and increasing corporate income exponentially.24 CEOs make hundreds of millions of dollars per year, and oil giant Exxon-Mobil earns $1,300 per second in profits.25 The mess made of the economy is now becoming visible in the skyrocketing costs of all goods because of the outlandish price of fuel. In a domino effect, gasoline's record highs have sent shock waves through every corner of America because “almost everything is made out of petroleum” and everything that isn't is transported by it.26 Car companies that had previously focused on building sport utility vehicles and trucks, like General Motors and Ford Motors, have lost billions and are struggling to change their production lines.27 At the other end of the spectrum, household products as benign as diapers are getting more expensive because they are made from petroleum,28 and dairy products cost anywhere from 6.5% to 40% more than previously because the corn used to feed animals is being diverted to make ethanol.29

As if paying more for everyday necessities was not bad enough, thousands of families are losing their homes as well. Around the country, foreclosure rates have risen incredibly—one in every 43 homes were foreclosed on in Nevada in the second quarter of 200830—and defaulting on loans and mortgages is nearly commonplace. Predatory lending practices, which had gone unnoticed due to lack of oversight, are taking their toll. Although certain banks made huge initial profits by giving loans to those who could not keep up with post-teaser-rate interest, the obvious problem struck and those loans became worthless.

The repercussions of this are similar to the crashes and failures of the Depression. Two large financial institutions were hit hard recently; Bank of America's profit dropped 41%,31 and Citigroup actually lost $2.5 billion, but their stocks rose because the hits were not as bad as expected.32 Financial giant IndyMac's failure, the fifth in 2008, prompted the first bank run in America since the Great Depression, sending people scurrying in fear to withdraw their savings.33 The seizure of major banks by the government and the bailouts like those of Bear Stearns, Fannie Mae, and Freddie Mac also draw parallels to the 1930s, and to the Reaganomics of the '80s that the Bush administration models itself after. Banks that failed during the Depression were allowed to pay off their debts with as little as ten cents on the dollar, while “hundreds of thousands of individuals” had to pay off theirs completely.34 Some government officials say that these institutions are “too big to be allowed to fail,” because they carry so many of America's mortgages. Should they go under, so would the entire real estate market, taking a large chunk of the global economy with them.35

Why were these single banks allowed to get so big to start with? Is not the cardinal sin of investing to put all of one's eggs in one basket? Yes; but the new aristocracy is rich enough to take huge risks with other people's money. Hedge funds in particular are a popular way to do so. Often they include things like mortgages and loan debts that are to be paid to the fund. They carry huge risks, but give enormous returns.36 The top five hedge fund managers in America earn over 13,000 times more than the top five American military leaders combined, about $12.5 billion per year. This, as the vast majority of people cut down on driving and try to make their budgets stretch. The top hundredth of a percent has surpassed the level of wealth it reached in 1928 and now earns over nine hundred seventy-six times what the bottom 90% does.37 There simply is no more oversight to keep the elite from taking advantage.

How, then, can the tide be stopped before the full effects of a true depression hit the nation? In the '30s, Roosevelt created dozens of programs to get the newly destitute working again, preceded by grants that gave hungry families enough money to eat until the Works Progress Administration, National Recovery Act, Civilian Conservation Corps, and other initiatives got off the ground.38 However, it was not until the enormous economic defibrillation of the Second World War that America's infrastructure could operate under its own power again. Millions of men went to war, and millions of women suddenly had factory jobs producing arms, parachutes, and planes for them.39 How would that play out in today's world? Even in Roosevelt's time legislation such as that in the New Deal was considered to be too lenient, “handouts” that gave the poor incentive to stay unemployed. The president himself was not all that happy about the unemployment relief he himself designed40—but it passed.

Today, after years of systematically taking apart the fabric of the New Deal, even Social Security is under threat from hard-line reactionaries who want to privatize it, completely defeating the purpose of a social safety net.41 Fortunately the outcry was great enough, including voices as respected as those at the Brookings Institution, that the deed has not been done. Those who desire it, however, are still in power, and the attitude required is still prevalent among many politicians who are a little too friendly with the super-wealthy. The probability of another New Deal being implemented is low. The chances of the economy being kick-started by another huge war are even lower. For one, America is in a war of sorts right now, although it is not against an established nation. Another World War is practically out of the question, given the nature of the global economy and diplomacy. If, somehow, an enormous conflict were to spring up, the draft is no longer in effect, which means that millions of men will not suddenly have jobs as soldiers. Even if the draft were to be reinstated, there are no longer enough factory jobs to bolster employment if a huge influx of weapons became necessary. Not only does the United States already have an utterly unbelievable arsenal, including an estimated 5,500 nuclear warheads,42 but the factories that produce such weapons are largely mechanized. Lockheed Martin Corporation employs only about 140,000 workers (most of these researchers and scientists rather than assembly line hands), yet it is one of the largest manufacturers of weapons technology in the world.43 And again, even if millions of new laborers were required all of a sudden, the production would not spur competition or prosperity. Only the leaders of the corporations who gain no-bid contracts with the government would benefit, like Halliburton did in 2004 because its former CEO Richard Cheney had become Vice President and got a nice share of the profits.44 Everything always comes back to the money and the “good ol' boys,” just like it did in the nineteenth century when the robber barons reigned supreme.45

Clearly the populace has not learned much from history, and the top echelons of society have chosen to ignore it in pursuit of personal wealth. This cycle cannot continue without spreading ruin across the country and the world, perhaps leaving billions destitute and repeatedly destroying multiple economies. We are well on our way to another crisis of epic proportions. Despite sporadic dips in the price of oil, despite the frenzied fuss over green alternatives, the cost of living will continue to climb until America falls again into the awful quagmire of a true Depression.