Recession has hints from the 1930s depression

August 12, 2011 7:44:15 PM PDT
The current economic slowdown is often described as the worst since the Great Depression of the 1930s. Looking back, it appears as though we've been here before.

During the Great Depression of the 1930s, the stock market crashed, unemployment hit 25 percent and Franklin Roosevelt ordered the U.S. Government to start spending.

Roosevelt's "New Deal" put people back to work and got the flattened economy going again. The Bay Bridge, the Caldecott Tunnel, the Civic Auditorium, San Francisco's Aquatic Park and the Alameda County Courthouse were built under this plan.

"It built infrastructure like dams and highways," said UC Berkeley professor Richard Walker, Ph. D. "It repaired roads and sewer systems."

Walker notes that while all the government spending was going on, conservatives raged that Roosevelt's administration was wasting money. One political cartoon from the Chicago Tribune showed New Dealers shoveling money out of a wagon while Joseph Stalin writes his plan of action for the U.S.: Spend, spend, spend.

"The conservatives still believed in a balanced budget; they thought this was just throwing money away," said Walker.

In fact, Walker says the New Deal saved the economy, and the proof is what happened in 1937. In an effort to balance the budget, Roosevelt cut spending, increased taxes and tightened the money supply.

"The result was the economy went into a secondary recession in 1937," Walker said.

Congress and the president today are making the same mistake, according to Walker.

But it's not as clear as that, according to ABC7's Political Analyst and Professor Bruce Cain. For one, Roosevelt cut spending at the same time he raised taxes, and the fed squeezed the money supply.

"Sorting out which of these things was the most important is difficult, particularly if you have an ideological lens that you're bringing to the whole debate," Cain said.

Professor Walker would tell you to consider what happened when the economy went into its double-dip in 1937. Roosevelt reversed himself, started more government spending, raised the deficit and loosened the money supply. The economy began to grow again.

One thing he didn't do: Roosevelt didn't lower the taxes that he had raised. Those stayed in place. The tax on those making over $1 million annually was 75 percent.


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