DEPRESSION AT ITS ROOTS

I thought that, for a change of pace, we would discuss a really fun topic like depression. No not the mental breakdown type, but the fiscal meltdown type instead. Although if you have a financial breakdown, it’s sure to cause a plethora of the mental type, so maybe we’ll wind up talking about both. They say that money can’t buy happiness, but tell that to the homeless guy sleeping in a cardboard box in a back alley or under a bridge somewhere. Or to the recent winners of the mega-millions jackpot as they were popping the champagne corks. It’s hard to imagine any individual or family where money doesn’t play a central role.

Throughout American history there’s been at least a dozen major depressions, or panics as they were sometimes called, starting as early as 1807. There was also a few milder recessions thrown in for good luck. (Ronald Reagan used to say that a recession is when your neighbor loses his job, and a depression is when you are thrown out of work. Not a bad definition.) But the depression I would like to focus on is the one back in the thirties. Not the 1930s, but the 1830s, or 1837 to be exact. It’s hard to believe they could have a depression back then when the entire U.S. population was only about 17 million. But not only did they have a depression, it was just as severe and destructive to people’s lives as the 1930s joyride. Those that are such strong advocates of capitalism somehow never get around to talking about capitalism’s failures, and how numerous they have been.

The U.S. government in 1837 was a modern day tea party’s dream come true in that it hardly did anything and hardly spent any money. It had a small Army and a few ships they called a Navy, a State Department that conducted a limited amount of foreign affairs, a small Attorney General’s office, and perhaps something that looked like an agriculture department to help out farmers. Even then people recognized that food was too important to deny at least some government involvement to help offset  the hardships that droughts or flooding rains may have caused farmers. But outside of these limited functions there was little government activity. Revenues came primarily from tariffs on imported goods, so tax rates on rich or poor was a non-factor.

In November of 1836, the only man in U.S. history to be elected from the House of Representatives directly to the White House, Martin Van Buren, became president in the following year, succeeding the the 8 year presidency of Andrew Jackson. Economic times were good at the start of the Van Buren presidency, as land values started to sky rocket in value because of increasing numbers of people pushing west. One might say there was a growing real-estate bubble, not unlike the one that has led to our current economic down-turn. Banks were eagerly encouraging people to borrow money and invest in real estate to keep land values rising.  Sound familiar? However, with all the cheap money flooding the market, inflation started to soar, and the government, in its infinite wisdom, declared that outstanding debt would have to be repaid in gold or silver, which made all the paper money on the market almost valueless. Instantly, there was widespread panic, as people rushed to their banks to withdraw their life’s savings while they could. Almost overnight, 40% of the banks in the U.S. had to close their shutters, since they were unable to meet their financial obligations. Financial destruction and ruin ensued on a massive scale in most people’s lives, from which  they would never recover.

Since governments in those days didn’t do much of anything outside of defense and foreign affairs, Van Buren was clueless as to what remedial actions the government might take to alleviate the hard financial times. So in the end he did nothing, and the unrelenting depression dragged on for 6  years until finally the economy started to improve in 1843. The depression caused Van Buren to lose his re-election bid in 1840, and he probably went to his grave insisting it was not government’s role to bail out the economy. Sort of like today’s far right, who are still monumentally upset that the current administration bailed out General Motors and Chrysler in their time of need,  instead of letting them go out of business, with a few hundred thousand more jobs going down the drain.

What is the relevance of the 1837 depression to our current world affairs? It’s not that capitalism is bad. Indeed, it’s probably the only real workable economic system at this stage of man’s evolutionary development. Even Communist China recognized that when they went to a market economy. But capitalism does have some deep fault lines that are ripe for exploitation by the unscrupulous. For example, when my wife and I bought our first house, people acquired real estate primarily for living purposes. We were required to put 20% of the purchase as a down payment. But early in the 21st century the fast-buck artists felt there was a quick killing to be made by constantly inflating real-estate values through convincing potential home-buyers to secure mortgages they could ill-afford with virtually no down payment. Real-estate prices could only go up, they told dubious buyers, before the crash came and all the foreclosures with it. And all the people now sitting in their homes with mortgages that are under-water. The 1930s depression was caused by the same-type of fast-buck artists that were exploiting the stock market, causing ever-increasing and unsustainable stock prices until the crash came.

So in the end it doesn’t matter whether it’s capitalism or socialism, or any other ism. What matters is the honesty and integrity of the people participating in what ever system is put in place. What’s important is to have the safeguards necessary to prevent the dishonest, the unscrupulous, and the out-and-out scammers from perverting whatever the chosen system of economics is. One final note. Mitt Romney has secured the GOP nomination, but during the primaries he referred to himself as a “severe conservative.” I wonder if that’s like a severe depression. Maybe it’s just a severe mental breakdown.