One lifetime, two Depressions


'Why don't you give them something, Mum?'

'I'd like to, but I can't. Your own father is out of work.'

My mother's words have stayed with me ever since the Great Depression of the 1930s. They followed the departure of yet another sad-faced man who had knocked on our back door that day. He pretended to be selling bootlaces but it was obvious he was simply begging.

The Depression was bad in Australia. The statistical unemployment rate reached 30 per cent, although the reality was worse. Tenants couldn't pay the rent and many were evicted.

Australia had amassed huge war debts, borrowed mostly from English banks. Sir Otto Niemeyer of the Bank of England came to Australia in 1930 and demanded the government reduce spending and cut wage rates. Projects were cancelled, workers sacked. Those with savings clung to their money out of fear and uncertainty.

The 1930s were miserable and a waste of years when Australia should have been building for the future. What had gone wrong?

The collapse of share prices in New York in October 1929 was the trigger, but not the cause. It was lust for wealth by investors and financial manipulators who bought shares, often with borrowed money, in the belief that share prices would keep going up, allowing them to become effortlessly richer. Inevitably, the bubble burst.

The economic disaster caused widespread misery but had one good result. It spurred some economists to question the conventional wisdom of shutting down projects and lowering wages when recessions loomed.

One of them was J. M. Keynes of Cambridge University. He changed from his conventional belief in 'the free market' to the need for government action and financial stimulation in the face of serious economic downturn.

In the US, President Roosevelt took some limited action in accord with the policy Keynes was to advocate a little later. He called it 'The New Deal' and began massive government construction projects such as the Hoover Dam. Employment was boosted and the bad effects of depression were reduced.

After the Second World War, the economic principles adopted by Keynes and supported by others, such as the American economist and author John Kenneth Galbraith, were widely accepted for several decades. In Australia, both major parties adopted Keynesian economic principles. The original Liberal Party platform included: 'The preparation of a program of public works ... to be put into operation at the first sign of any recession.'

Unfortunately, memories of the Great Depression faded, and in the USA a new generation of economists, such as Milton Friedman, of Chicago University, revived the old, fraught policies of the 1920s. Wall Street, or a significant part of it, once again gambled with borrowed money until, in 2008, the US fell into a deep recession that spread to other countries. When America sneezes the world catches cold.

No wonder crowds throughout the US are now demonstrating against Wall Street — a loose term for those who made huge fortunes at the cost of stability and jobs for ordinary workers.

Typical of this feeling, at the recent unveiling of the Martin Luther King statue in Washington, his son, also Martin Luther King, deplored the unfairness of the top 1 per cent of the population possessing 40 per cent of the nation's wealth. Equally deplorable are the financial rewards and the power of corporation leaders who receive multi-million dollar payments — even when their companies are floundering.

President Obama has suffered criticism over the recession, mostly unfair because he has been hamstrung by a recalcitrant Congress. He injected government funds but, instead of going into new 'Hoover Dams' or hospitals, they have been swallowed by the same financial institutions that were largely responsible for the trouble.

Meanwhile, high unemployment persists in the USA, and the super-rich refuse to make any concessions, but hold on to their low tax rates and concessions.

Australia has fared much better through the crisis. Substantial government funds were provided promptly, albeit with some mistakes, for projects that employed workers. Economic health and stability were maintained and valuable projects completed. Australia set a good example for the governments of other countries.

I have seen two serious economic crises during my lifetime, with reasonable stability in between. With hindsight, it is not hard to see that a now-discredited economic theory was forced upon Australia at the time of the Great Depression — causing misery— and that a contrasting economic principle has been successful here in recent years. We may refer to it by the awkward term 'Keynesianism', or more simply, as 'common sense'. 

Robert CorcoranRobert Corcoran was raised in a working class household where politics was seriously discussed. He became a civil engineer after many years at night school but politics has been a lifelong interest. He has had a number of political dictionaries published.

Topic tags: Robert Corcoran, Occupy Wall Street, Great Depression, Global Financial Crisis



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Existing comments

The alternative view is that the Depression was not caused by "greed" at all. Sure, people are greedy. But they have been since Adam. Was there an unusually intense outburst of greed in the 1920's that caused the Depression? No, but there was a ramped up government interference in the money/credit supply, creating huge amounts of artificially loose credit - just as there was over the recent decades leading up to this current crisis. Coincidence?

And notice that, for all the nods to the "free market" and Friedman, etc, the overall economic policy of Western economies has been fundamentally steeped in Keynesian lever-pulling since WWII. So why are we having this massive, intractable recession if Keynes was right and we've been implementing his remedies?

Notice, too, that the "misery" causing pre-Keynesian plan forced on Australia in the Depression actually got Australia on the road to recovery years before places like the proto-Keynesian USA of Roosevelt.

Check out the completely contrasting "Austrian" view of business cycles of Mises, Hayek (Nobel Laureate) and Rothbard. Keynes, from their perspective, is completely discredited.

You know, there are other points of view on all this. To put it another way: "the science is not settled."
HH | 21 October 2011

HH, naturally, there are many views on this topic, so no one has a monopoly on it but the author has raised reasonable questions.

The situation today sees public support for failed capitalist projects paid for by those who work in them, the hard done by workers, as always.

The situation has changed, with the Reagan-Thatcher-Hawke adoption of neoliberalism and the recent form of globalisation.

It was Blair's chum, Brown, who let go of the levers of regulation in the UK, as had happened in the US under every president after Reagan, that let loose the recent collapse of capitalism we are still witnessing today.

The banks who invested in the idiocy of Greece, Spain, Ireland, Italy and all the other basket case economies, should be allowed to die, and their senior managers should pay the cost, along with their investors.

We are clearly not capable of living without boundaries, and the idea of a 'free market' is a total nonsense, unless perhaps it was to be based on equal power amongst trading nations, which it is clearly not.

The discredited economic policies of the Reagan years are working through our pockets right now.
Harry Wilson | 21 October 2011

To put HH's thesis another way: which caused the explosion, the match or the gunpowder? Under the model in question, I think it is reasonable to argue that the combination of greed AND an oversupply of credit were to blame. Not that those were the only factors involved; but those two are what are being argued about here.
Mormon Socialist | 21 October 2011

with respect, the questions have been raised long ago and there are answers which require a response.

But we're in agreement on important points. Anyone who knows about Austrian economics knows they totally agree with you about letting the banks who have wrecked the European economies fail (plus Goldman Sachs, etc). It's the state created banking system (fractional deposit lending, printing of money, bailout by a federal reserve) which is precisely the cause of the so-called "capitalist" business cycle. It's not free market at all - it's actually anti-free market, with the hapless taxpayer/consumer as the lender of last resort through taxation/inflation.

Apart from banks, and as you rightly imply, failed capitalist projects should be allowed to die. That's what happens on a free market every day. But not with Obama, Blair/Brown, Clinton (Fannie/Freddie), Hawke(car industry), and more or less just about every western leader since Calvin Coolidge. Pure free markets - or close to it - can and have existed. They don't now because governments characteristically love wielding power.
HH | 21 October 2011

Incidentally, (and I'll shut up after this) the original article is inherently contradictory. You can't push both a "greed" theory and a Keynesian theory of the causes of economic recessions. Keynes famously held that the cause of depressions was inadequate aggregate demand. It had nothing to do with people being unusually greedy. Quite the contrary: they weren't demanding enough.
HH | 21 October 2011

Thank you for sharing your long-term view, grounded in personal experience and analytical studies.
Delia | 21 October 2011

"Pure free markets - or close to it - can and have existed. They don't now because governments characteristically love wielding power." So why did pro-market President Bush spend hundreds of billions of dollars during the savings & loans crisis? He did it to protect capitalism. People don't want a totally free-market because the consequences will be terrible for some. Some people will become very wealthy, while others are put through the mincer, and most people don't think that ends up being very fair for the losers' children. Most people, in the pursuit of social justice, want their government to set rules, and balance out the extremes that a free market will inevitably produce.
Russell | 21 October 2011

The Hoover Dam (originally the Boulder Dam) was authorised by Congress in 1928 in the time of President Calvin Coolidge. It was built between 1931 and '36. Herber Hoover was president from 1929 to '32. Roosevelt dedicated it in 1935. One of Roosevelt's first acts was to cut all government and military salaries by 15% and government spending by 25%. He did this to pay for the New Deal. Certainly, not Keynesian. On the other hand, the New Deal ended up paying for itself, because the economy grew in response. Economically, he did not need to cut, but politically, perhaps he did, to convince others the New Deal was possible. To be fair to Keynes, he pointed out that in a balanced economy, savings = investment. Perhaps we can conclude that a bubble is when investment exceeds savings significantly, and a depression when investment is significantly less. And when the rich 1% hold 40% of a country's wealth and do not invest it in that country, that economy will be depressed. Keynes also identified that the ideal level of economic activity was not a natural point of stability. We have to work to achieve the balance we want. Markets won't do it.
Peter Horan | 21 October 2011

I remember it well though I was young, a very frugal and cautious mother, Dad catching fish every w/end and I off on the bike to both grandparents. And going to grandparents for lunch from school - no tuckshops then. I started work at 14, I have forgotten the lessons I learned from older workrs
margaret o'reilly | 21 October 2011

Thanks Russell, but you really have to supply evidence. Here's mine: Hong Kong since 1950s, nearest thing to a pure free market we've had in our time - vastly more so than Australia ever, arguably. No starvation, very steep upward mobility from lowest rungs of poverty (in newly arrived refugees from Communist China in the '60s, '70's and '80s). From a base of rank underdevelopment, passed Australia in per capita GDP in the '90's. Look it up. Savings and loans crisis: caused by government loose credit regulations (remember: in a pure free market there would be no fractional deposit banking whatsoever - it's fraud on the depositor.) Bush in his bailout, stealing taxpayers' hard earned wealth and doling it out, thereby rewarding economic failure, was no friend of the free market and wasn't "saving" capitalism, but undermining its very dynamic. Obama does likewise, though, unlike Bush, possibly with intent. Never believe a politician who is out to "save" capitalism. He's invariably just shoring up his voter support.
HH | 21 October 2011

Sorry - I can't let this pass, but PH, even left-leaning economists now admit the New Deal made the Depression longer and deeper. See, eg, Cole and Ohanian, Journal of Political Economy Aug 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis". Australia, with no New Deal, recovered earlier.
HH | 21 October 2011

Thanks for that reference HH. I did not intend to imply that the New Deal was an outcome of Keynesian thinking although I thought the ND expressed some of K's predictions; perhaps not, as the paper indicates. It would help to answer the question to know what would have happened if Roosevelt had done nothing. That is a "what if ...", and you argue that, by comparison, other countries recovered quickly, so, why not the US. But, indeed, the deeply isolationist USof the 30's may not. Indeed, the second world war was the key. This ABC Background Briefing, broadcast 10 years ago today, is fascinating:
Peter Horan | 21 October 2011

Hello HH, and thanks for stirring debate. About greed:it may be widespread but is very dangerous indeed in people with the power to damage a country's economy.
And Peter Horan, you make interesting comments about the New Deal.Roosevelt did not start Hoover Dam but construction continued when expenditure was being curtailed. In hindsight, the New Deal was too timid when courageous, full-blooded Keynesian tactics were badly needed.
Robert Corcoran | 21 October 2011

Prof. Tony Makin in today's Australian (24/10/2011):

"The peer-reviewed Australian academic economics literature now includes numerous papers denying that fiscal stimulus worked to save Australia from recession. To my knowledge, no published papers show the opposite, apart from those of government economists (who would say that, wouldn't they?)."
HH | 24 October 2011

American Big Business made a fortune out of trading with the Nazis during the 1030`s, right up to the entry of the US into World War 2, at the end of 1941. This was for essentials needed for war. However, it did not stop then, but was carried out in a different way. In fact, it was said by the Nazis, that without the help of the US, they would have been unable to have invaded Poland. So it always sounds pretty hollow to me, when Americans say they won World War 2 for us all.
margie | 25 October 2011

Correction, my last post should have read 1930`s Now in fairness to the Americans, we need to look at what happened in Yugoslavia in World War 2, and what happened to the Serbs and Jews and others, and the disgraceful part religion played in it.
margie | 25 October 2011


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