UNFORTUNATELY CHRIS TROTTER, WHO OFTEN writes so well, can be found peddling another dangerous historic myth. This one, this time, about the Great Depression. (about which there are many, many myths, most of which would be destructive if believed.)
If were to be believed — if his recommendations were to be followed, on the back of his myth-making — it may well cause another.
Writing to advocate that the Luxon government be more spendthrift, Trotter says
When the 1929 Wall Street Crash sent the economy of the United States into a tailspin, the experts of the day called upon the administration of Herbert Hoover to apply the accepted remedies. Accordingly, Hoover’s Treasury Secretary, Andrew Mellon, responded with his now infamous instruction to:
“Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate. It will purge the rottenness out of the system.”
In following this advice, however, the Hoover Administration inflicted extreme hardship on millions of Americans, and in so-doing not only liquidated itself, but also came alarmingly close to liquidating the whole capitalist system. It took an American aristocrat, Franklin Roosevelt, with more intelligence and a bigger heart than Hoover and his conventional wisdom, to rescue American capitalism from itself.
Mutatis mutandis, the response of successive New Zealand governments to the Great Depression mirrored the conventional economic thinking of Mellon and his advisers. Saddled with obligations it could no longer afford, the Reform and United Parties cut, cut, cut, and cut again – unleashing massive deprivation and misery across the country. This time it was Labour that came to capitalism’s rescue.
He could not be more wrong.
And wrong in virtually every sentence.
LET'S START WITH MELLON'S alleged "instruction" to "liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate" —liquidate all monetary assets in summary, at whatever price may be gotten for them, in order to "purge the rottenness out of the system."
Fact is, it would have, if that programme were followed — as it had been following the much greater crash in 1921. (Sometimes called "the forgotten depression," or "the crash that cured itself.") But the “quote” was not Mellon's but Hoover’s, his president, and it was him contrasting the “liquidationist” programme of the type successfully followed in 1920 with the “interventionist programme” he intended to follow instead.
It didn't work.
The more Hoover tried to carry out his interventionist programme from 1929 to 1932— inflating wages, trying to raise falling prices, spending like a drunken merchant-man, adding enormous debt to a government all but crippled by the inability to pay it down — the more things spiralled down into the mire.
From 1929 to 1932 Hoover did the exact opposite of sitting on his hands as he should have done. Instead,
he was virtually Keynes-Lite, as he himself boasted in his 1932 presidential campaign:
We might have done nothing [said Hoover]. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.... No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times.... For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered.... They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.
Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for ... "the common run of men and women." Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom.... We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.
Featured in Hoover's plan were increased taxes, lowered interest rates, huge deficits, public dams, public works, restrictions on immigration and trade, and government regulation of banking, finance, industry and labour markets.
Hoover's heavily interventionist programme — doing everything to raise prices when demand had already collapsed — failed miserably. Unlike the solution found in 1921 (to lower prices to meet lower demand), which saw things turn around within eighteen months, things were still dire four years after the 1929 crash when Trotter's hero Franklin Roosevelt took over.
And then, with even less intelligence and much less honesty, Roosevelt doubled down.
In the 1932 election campaign, Franklin Roosevelt accused Hoover (accurately) of “reckless and extravagant” spending, of thinking “that we ought to center control of everything in Washington as rapidly as possible,” and of presiding over “the greatest spending administration in peacetime in all of history.”
And that was all true.All of it—all the spending, all the alleged “stimulus”—all an attempt to keep up wages and prices and keep the engine ticking over in the manner to which Trotter et al suggest we do today with far less reason, and much less room to manoeuvre. .
And it had failed. It had failed spectacularly.
it failed just as monumentally when Roosevelt tried it.
By 1933, when Roosevelt took over in the States, nearly 13 million Americans were unemployed. Yet when the Second World War began, after eight years of further intervention by Mr Roosevelt (whose advisers conceded their New Deal was based on the “
Hoover New Deal”), nearly 12 million were still unemployed (unemployment had never dropped below 20% for the whole of the decade) and Roosevelt was to embrace a world war as a way to get the unemployed out of his hair.
We do NOT want any sort of repetition of that!
BUT WHAT ABOUT TROTTER'S argument that the Reform and United Parties here had followed the liquidationist programme and failed, and had to be rescued in 1932 by Michael Savage's Labour.
Well, Trotter has finally hit on the one fact in his screed in which he's right. Gordon Coates's and George Forbes's Reform and United Parties did inadvertently follow a semi-liquidationist programme. Despite their own interventions, and despite the US's disastrous Smoot-Hawley tariffs, they did allow prices to fall, which (along with Australia and the UK adopting similar programmes) did eventually allow green shoots to appear here by 1932. So that by 1935 when Savage's Labour was elected ... well, things were already on the upswing.
It wasn't at all that "Labour that came to capitalism’s rescue," as Trotter alleges.
It was, instead, that capitalism, even in the muted form allowed to it, allowed Labour to take the credit for a job already done, and to spend up heavily — helping poorly-informed writers like Trotter to confuse effect for cause.
Fat is: the First Labour Government simply reaped the benefits of the recovery that was already under way. As economic historian John Gould outlines:
From 1934 overseas prices were recovering and the country [New Zealand] could not help but be better off. The [Labour] Government benefited, too, from a balanced budget, a buoyant public revenue, and a healthy reserve in London, inherited from its predecessor. It made good use of these propitious circumstances. Its initial step was simply a Christmas bonus for the unemployed – a symbolic if small pledge of humanitarian readiness to cut corners.
It went on, in the busy session of 1936, to restore wage and pension cuts, to bring in a basic wage, a 40-hour week, and a major programme of public works; it built up the unions by bringing back compulsory arbitration and adding to it compulsory membership of unions; it embarked upon a great housing construction programme; it brought in a price scheme for dairy products which guaranteed the farmer a reasonable income; it tried, without notable success, to encourage secondary industry so that there would be more jobs for wage earners.
The Government's opponents never tired of inquiring, “Where will the money come from?”; the Government's answers were never explicit, but in fact a good deal of the money came from State credit created by the Reserve Bank. This institution, by an Act of 1936, had become a fully governmental body; where these expensive programmes could not be financed out of current revenue or overseas funds, the Government simply borrowed from its own bank. Neither the housing programme nor the guaranteed price could have been financed without such credit. Labour had collected most of the Social Crediter's votes in 1935, and this, which was far from their desires, was their reward, a policy a good deal more Keynesian than Douglasite, however.
The cornerstone was set in the arch in 1938. Already the government had shown its concern with public health and welfare; in 1938 the two were integrated into a “social security” system by which the State guaranteed medical advice, medicines, hospital services to all whatever their means, and a wide range of pensions to all likely to suffer hardship. In part the scheme was financed by special taxation, in part from general revenue. It was, among other things, a ready vote winner in 1938; its attractiveness, together with the Government's energetic record and the National opposition's general nervelessness, proved irresistible.
But the spending, while just as irresistible, proved too much. The Labour boom ended in another bust, confusing later writers who were less than careful at their economics. Because the Labour victory in 1938 came just in time ...
Hard on the heels of the victory came tribulation. Thanks in part to public works construction ... draining overseas reserves, in part to a flight of private capital from the country, scared by a government that still seemed “socialistic”, in part to a sag in prices for exports jeopardising the guaranteed price system, and in part to the unsympathetic attitude shown by London financiers to some £16 million of debt shortly falling due, things looked ominous in 1939. The debt was converted on rather stringent terms; exchange and import controls were applied.
But the real saviour [for Labour] was the war that broke out in September. Once again farm exports were at a priority and the mobilisation of resources for the war effort permitted the introduction of more thorough controls than would have been tolerable in peacetime.[1]
From 1929 to 1935 the United/Reform programme was semi-liquidationist, and it semi-succeeded.
It succeeded to such an extent that from 1935 to 1938, Labour could take the credit, apportion blame elsewhere, and deliver profligacy as from a horn of plenty.
And then, as Margaret Thatcher observed so sagely many years later, like all socialists they began to run out of money.
What saved Labour however was price controls, rationing, and war.
I do trust that Mr Trotter does not want any of that either.