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The Great Deception:

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  An accusing finger was pointed at the Smoot-Hawley Tariff by Department of Commerce figures.
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  Since passage of that tariff, there had been six general upward tariff revisions in Europe, nineteen limited and five general upward tariff revisions in South America, plus quota limitations, exchange controls and gold embargoes. The Commerce Department pointed out:

  "--- under the highly interdependent world economic system of today, the repercussions of trade-control measures or financial dislocations of any important country are so widespread as to lead to similar or defensive reactions on the part of other countries."

After two years of futile "confidence game" tactics, they were now worried about a "credibility gap."

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   Treasury Secretary Mellon testified in March, 1932, before the House Ways and Means Committee:

  "The entire foreign debt is not worth as much to the American people in dollars and cents as a prosperous Europe as a customer."

  He pointed out that exports for the first seven months of this fiscal year were almost $1 1/2 billion below the average for the preceding ten years. Since 1923, the U.S. had maintained a favorable balance of trade, collecting income on private foreign investments and receiving payments on governmental war debts solely by loaning Europe the money required to make these payments and taking the rest in gold. The amount taken in gold was just $685 million. Loans totaled over $4 1/3 billion.
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  However, with the present lack of confidence in foreign bonds and the new high tariffs, it was now impossible for foreign nations to meet their obligations to the United States.
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  Three banking groups urged action on war debts and reparations obligations. (Wiggin-Layton report; Report of the Young Plan Committee; Report of the Foreign Creditor's Standstill Committee.)
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   Dr. Nicholas Murray Butler, Pres. of Columbia University, and Director, Intercourse and Education Div., Carnegie Endowment for International Peace, launched a personal crusade against the economic evils that he saw tearing the world apart.

  "[E]conomists and men of affairs drawn from many lands in conference, have clearly stated --- that what remains to be done must be done by governments in the realm of formal politics. --- [It is only the failure of governments] that is responsible for the world's inability to achieve stabilization."
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  "[1931 marked the climax of those forces] which since the close of the Great War have been making for the undermining and overthrow of the world's economic and financial system."
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  "[Perpetuation and worsening of the world crisis is caused by] attempts to achieve the unreasonable and the impossible in the field of war reparations and so-called intergovernmental war debts."
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 "[Noting the obvious contradictions of ignorant policies, he pointed out] the accumulation of the world's free gold in two centers, the raising and stiffening of tariff barriers in every direction, and the cries for a return to prosperity, while insisting on the perpetuation of conditions without parallel in history."
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  "Governments have almost without exception shown themselves stubborn in their timorousness, and both unable and unwilling to understand the conditions which confront them --- ."

   Al Smith - ex Governor and Democratic Presidential candidate in 1928 - told the Economic Club of Chicago that war debt and reparation cancellation or reduction as well as reduction of tariffs were essential for recovery.

  "The notion so often advanced here in the United States that we are simply passing through one more natural period of depression and panic from which we shall recover as we have recovered from others is illusory. --- These amazing conditions bear no relation whatsoever, either in origin or character, to those we are accustomed to associate with the years 1837, 1857, 1873, 1893 and 1907."

  In May, Sen. Borah (R. Utah), attacked the causes of the Great Depression. He pointed out that the Depression was world-wide in nature. The collapse of world credit, exchange and trade was the fundamental cause dragging down the U.S. economy.
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  Borah would be the most persistent and courageous political voice in the U.S. on this issue. As yet, he offered no remedies.
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  Even Alexander Noyes, the prominent N.Y. Times financial columnist, finally admitted that there were peculiar evils present in this Depression that were absent from previous depressions. Noyes finally acknowledged that international debt entanglements, over expansion of productive capacity in the speculative boom of 1929, and Europe financially and economically prostrate, were important factors.
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  However, he still had his heart in sunny confidence. This too shall pass, he yet again reminded one and all - but he didn't offer any explanation as to how it would pass - or how the process could be speeded up.
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  A banker noted that the French public - finally feeling the full sting of the Great Depression - was now taking a more "reasonable" view of the reparations problem. The passions of WW I were being drowned in the growing desperation of the grinding Great Depression.
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  The presidents of seven railroad unions joined in calling for a 25 year moratorium on all war debts. The restoration of world trade was an obvious necessity for improvement in railroad job prospects. A Foreign Policy Association report on "American Foreign Policy and World Crises" emphasized the deleterious impacts of our tariffs.
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  Leading world bankers voluntarily continued a "freeze" on German payments on short term credits. They pleaded for governments to remove the financial shackles from Germany. "There is no time to be lost," they exclaimed.
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  But the politicians did nothing.
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  At the end of May, 1932, Prime Minister McDonald decided to expand the upcoming conference on war debts and reparations at Lausanne to also include tariffs, quotas, embargoes, etc., to try to prevent world trade from declining to a practical standstill. No nation can recover until world trade is restored, he acknowledged.
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  But events were moving even as the politicians dithered. The Bonus Army arrived in Washington. The Bruening Cabinet fell in Germany and Von Papen was made Chancellor. German Young Plan bonds, originally sold at 90, now listed at 27.
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Policy epilogue - the triumph of Keynesian concepts: 

No extent of policy stupidity need be corrected. All could be overcome simply by running budgetary deficits and running the printing presses.

   This was typical of the lunacy amongst several economists that eventually culminated in the writing - and broad acceptance of John Maynard Keynes' "The General Theory of Employment, Interest, and Money (1936)." No extent of policy stupidity need be corrected. Politically difficult decisions about war debts and trade liberalization need not be confronted. All could be overcome simply by running budgetary deficits and running the printing presses.
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  The politicians loved it - and so it was Keynesian and command economy and redistributionist policies that triumphed.
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  FDR and some of those in his administration - especially the Keynesians during his second term - were heavily influenced by the "mature economy" stupidity arising from Marxist mythology.
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  FDR presented his "mature economy" concepts in a campaign address at the San Francisco Commonwealth Club later in 1932. There was no more room for growth. The frontier is long gone. Capitalism had simply become over productive. Productivity gains were a threat that would just cause greater unemployment (the "automation" myth). The task now was thus not to stimulate further growth, but to manage the economy to more equitably distribute its products.
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   Thus, the New Deal wouldn't "fail" to end the Great Depression and restore economic growth. It would never really try. It's primary thrust would be to arrange for the equitable distribution of material necessities, and the broad provision of security ("freedom from fear").
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  FDR was not adverse to efforts to reestablish foreign markets. He just recognized that the monetary disciplines and market mechanisms required for successful international commerce would prevent his experiments in monetary inflation, command economy policies and cartel-like price and wage fixing arrangements, and broad scale redistribution.
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  Indeed, the Great Depression was welcomed by FDR and many in his Administration as an opportunity to initiate their policies. They eagerly implemented those policies in ways that would cement the Democratic Party's new status as the nation's majority political party. Economic revival at the end of the decade was greeted with mixed feelings - and feared by some New Dealers as the closing of the window of opportunity for the implementation of their policy experiments.
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  By 1935 - after the first two years of the New Deal Administration - the initial command economy, price control and monetary inflation efforts had clearly failed to sufficiently mitigate the Great Depression. Then, Sec. of State Cordell Hull - a strong proponent of liberalized foreign trade - acting pursuant to legislation passed in 1934 - finally began negotiating reciprocal trade agreements to poke some holes in trade war barriers. It was not until 1938, however, that any real progress would be made on this front.
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  By 1937, New Deal policy failures threatened the failure of the Roosevelt Administration. However, with the outbreak of WW II in September, 1939, the threatened Allies commenced urgent rearmament programs. This stimulated U.S. exports, and initiated enough economic revival to save the Roosevelt Presidency and assure his reelection in 1940. However, many trade war restraints remained largely intact.
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   One of the most urgent economic policies implemented after WW II was the ending of the trade war and the continuous elimination of trade barriers. The increasingly influential Keynes and his followers played major roles in these efforts. This was clearly their greatest policy contribution. It would lay the groundwork for renewed economic growth and avoidance of the expected return of the Great Depression - and by the end of the century would reveal the stupidity of the "mature economy" and "limits to economic growth" myths.
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  There were other positive New Deal policies that would play important roles in the post WW II restoration of prosperity.
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  A rational system of banking regulation was finally provided. This brought to an end the chronically high rates of banking failures and frequent banking panics that had periodically plagued the nation since Andrew Jackson prevented the renewal of the charter of the Bank of the United States in the 1830s.
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   Securities and real estate disclosure, auditing standards and enforcement efforts strengthened securities and real estate markets and financing mechanisms. Although competition was being throttled by government programs, antitrust regulation and enforcement efforts attacked private restraints on competition.
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 When gold reserves became inadequate to maintain the value of the dollar in the 1970s, the unavoidable result of Keynesian policies was dollar devaluation, the increasingly vicious swings of the "obsolete" business cycle, and rising rates of inflation and unemployment existing at the same time (as historically has ALWAYS occurred in times of chronic inflation).

   When Keynesians had a chance to demonstrate in the 1960s how they could "obsolete the business cycle," reality would repeatedly perversely refuse to conform to Keynesian expectations. Their policies would drive the American economy into the double digit woes of the 1970s.
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  There was a period of initial apparent success bought by the expenditure of America's huge gold and hard currency reserves. When those reserves became inadequate to maintain the value of the dollar in the early 1970s, the unavoidable result of Keynesian policies was dollar devaluation, the increasingly vicious swings of the "obsolete" business cycle, and rising rates of inflation and unemployment existing at the same time (as historically has ALWAYS occurred in times of chronic inflation).
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  The "mature economy," "secular stagnation," and "automation" myths would again be revived. The 1980 - 1982 depression and fifteen years thereafter of above average real interest rates and below average economic performance would be the price that the nation would have to pay for full recovery from inflation at the end of the century and final proof of the stupidity of Marxist concepts.
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  There are still Keynesians, however, who have not yet gotten the message, and await the inevitable next recession to again advocate their dangerous policy nostrums.

   Dr. Butler spoke before a dinner of the U.S. Advertising Federation at the Waldorf-Astoria Hotel. He reported on the results of a questionnaire circulated amongst 53 prominent financial and business leaders. Almost all were of the opinion that removal of intergovernmental debts, reparations, tariffs and other trade barriers were prerequisites for economic recovery. He reiterated his call for the elimination of the obstacles to international commerce, and also called for international money reform.
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  He warned that the Depression was leading to an even greater disaster. The German plight is extreme, he warned. He blasted Washington politicians for lack of initiative and failure to boldly recognize and deal with these problems. Their fear of losing a few votes had reduced political discussion of the Great Depression to vague platitudes. When Congress (now evenly divided between Democrats and Republicans) had voted last December to adopt a resolution that refused to cancel war debts, it in effect voted prolongation of the Great Depression.
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  Dr. Butler again traced the Depression back to the Great War and its colossal destruction of the world's wealth and savings.

  "The statesman leads where the politician tries so to till the soil as to avoid giving offense. --- Would to god we could exchange a thousand politicians for even one statesman."
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  "There is abroad in our modern democracies an infectious disease which may best be described as candidatitis. It attacks both the seat of intelligence and the seat of courage. It thrives upon platitudes, the more sonorous the better, and upon rhetorical expression of truths so old and so universal that one must wonder why they are repeated."
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  "The troubles from which we are suffering are international in origin and international in extent, and they can only be cured by international remedies."

  From the political leaders of the U.S. - both Republican and Democrat - there came no response.
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