There has been a lot of talk about the Great Depression these days.  Prior to the past couple of weeks, commentators were just as prone to look at the late seventies and early eighties as an illustration of what was going to happen to the country.  Then one official report came out showing the economy deflating, followed by another showing half a million jobs lost and almost as many people leaving the workforce all together.

For all the talk, though, few people have an accurate picture of what actually happened during the early depression years.  Traders need this background.  Without it, government decisions and economic news has no useful context, and traders just end up following the market perception of events, instead of leading it.

Online Forex Trading has written earlier about the parallels between then and now.    With those in mind, what is most important for traders’ purposes is the chronology of events.  Did leaders react swiftly and purposefully, or were they forced into their actions, eventually stumbling onto solutions?  Investment is all about timing, and knowing how the past played out is necessary to have an accurate prediction of the future.

We all know what is happening in the private economy right now.  Without government intervention, we will enter a massive depression:   Events compound themselves so strongly that the recession develops an unbreakable path dependency, systematically fueling itself in a lengthy, painful cycle. What’s important, then, is the government response.  While we can’t predict the future on this page, we can give you the story of how a similar Democratic Party – in a similar power situation and facing a similar crisis – responded.

An important part of the equation is Congressional-Executive relations.  On the one hand, the presidency was far less powerful then than it is now.  On the other, though, President-Elect Obama comes to office as a far more minor figure than FDR, and facing a Congress that, while deferential, will dictate policy in the areas it chooses.  Anyone that thinks Tom Daschle will be writing the healthcare legislation, for instance, has never seen Ted Kennedy angry.  Tom Daschle may be the next HHS secretary, but he’ll be sleeping in a human size cage in Ted Kennedy’s office if it so pleases the Senator.  So, we shouldn’t be too surprised if Congress and the President end up having roughly the same levels of influence over economic legislation now as they did during the Great Depression. Next up are the issues.  The dynamics of discussion have changed, in that state bureaucracy and the social sciences are far more developed now than they were then.  The issues themselves, however, are strikingly similar.  Government stimulus is the single most important variable; debate over the regulation of union activity is a front-burner issue – especially for the long term health of the US dollar; etc.

How, then, did the Democratic government respond when it finally came to full power in 1932?  Everyone has heard of the Hundred Days.  They were just the beginning, though.  The New Deal is often treated as this singular concept that one day was just injected into American political economy.  The reality, however, is that it evolved as fast as the events did.

Like nowadays, labor unions were an important but secondary player in the Democratic Party when Roosevelt came into power.  Like Obama is doing now, Roosevelt started off putting his government firmly in the hand the corporations that had previously dictated policy, but told them action was necessary. The most important early act, perhaps, was the creation of the National Recovery Administration (NRA).  Business leaders regulated themselves, politicizing economic conflicts.  The NRA was a miserable failure, and probably did just as much harm as good.  Importantly though, section 7(a) of the act that created the NRA spurred considerable union activity.  By the mid-thirties, labor had replaced business as the primary ally of the president.

We are in a similar situation with the union bill that Congress will take up as soon as Obama is sworn in.
In areas outside of agriculture, it wasn’t until the mid-thirties that FDR’s administration got serious about its New Deal.  The Wagner Act and the Social security Act were both passed in 1935, and the Fair Labor Standards Act of 1938 created a modern system of industrial relations.

Look for a similar pattern this time around.  Obama’s picks for the most critical government positions could well have been picked by a Republican.  The consequences of the policy changes they will be forced to make, however, may fundamentally change the power dynamics in Washington.  Once that happens, however, change might start to flow from the executive branch as well as the few-and-far-between islands of responsibility in Congress.

Tags: depression, Politics, recession

This entry was posted on Saturday, December 6th, 2008 at 7:16 pm and is filed under Feature Articles, Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.