Financial Crisis Report

Hoover, however, thought exactly the opposite way, that a “government-supervised monopoly power” would be more efficient than the invisible hand Adam Smith (1723-1790), the Scottish economist that is often called the “Father of Economics”, is talking about in his book “The Wealth of Nations”. This is the theory that the system of supply and demand is the only one that is able to guide a modern and innovative economy with all its complex and dynamic structures.

Among other industries Hoover strongly regulated broadcasting, which, he thought, couldn’t develop well enough without the hand of the state. Besides, he wanted to see less commercial ads, which, of course, made radio stations less profitable. He forced the corporations of this industry to share their technological information and granted subsidies to the giants in this business. Furthermore, he expanded his department’s influence on the program and other decisions and reduced the amount of advertisements. With all this he more or less created a broadcasting monopoly, which through the Anti-Trust law is actually forbidden to every industry and which neglected the smaller competitors. These then had no chance to survive and the employment rate of this industry decreased drasticly. This is only one example of a monopoly created by Hoover in order to eliminate “destructive competition” but the same style of interventionism Hoover employed in a bunch of other industries like the oil industry, the farming industry, airlines, railroads and so on.

Too much goverment interference

Besides, Hoover interfered with labor relations to a high degree by means of different laws “in favor of the working class”. For example, he got through the time-and-a-half pay for overtime, which again doesn’t have to do anything with capitalism. Naturally companies try to avoid having anyone work longer under these circumstances and those who favor the Austrian school of economics would argue that this takes away the opportunity to increase one’s own wealth by voluntarily working longer from those who are very ambitious.  Consequently the economic potential is reduced. Another regulation that opposes the ideas of capitalism is the Railway Labor Act passed in 1926, which says that the government plays a big role in solving disputes between employers and worker’s unions through the newly created National Mediation Board.

Up to now, I described several factors that certainly slowed down the economic growth but probably could never cause such a breakdown of the economy. The main cause of the Great Depression surely was the Federal Reserve System and its monetary policy, which I will come to in a later chapter.

Although this was only a slight glance at the policy before and during the Great Depression, we can now answer the question whether it was caused by capitalism or not. Paul Johnson summarized the answer to this question in one perfectly adequate sentence:

The Great Depression was a failure not of capitalism but of the hyperactive state

Since there was no capitalism it is simply impossible that it could have caused the Great Depression.

Uncategorized Capitalism, Great Depression, Monopoly, Subsidies, Supply and Demand

Capitalism

It is a commonly held belief that the Great Depression was caused by capitalism, which is “an economic system based on the private ownership of the means of production” which “also promotes a free market regulated by supply and demand.” Opponents of the Austrian economic school of thoughts, which was founded and developed by the three Austrian economists Carl Menger, Ludwig von Mises and Friedrich Hayak on the principles of capitalism, say that capitalism “suffers from certain inherent weaknesses” and “is by its very nature unstable.”

Therefore, according to them, in a free market economy a cycle of ups and downs is inevitable and occasional economic downturns like the Great Depression are the consequence. In the following I’m going to examine whether it is true that capitalism is to blame for the Great Depression and, if not, which the real causes were.

Laissez-faire or overregulation?

The person who made most of the important decisions regarding the economic policy in the 1920s and early 1930s in the United States was Herbert Hoover (1874-1964), first as secretary of commerce (1921-1929) and afterwards as president of the United States of America until 1933. He belonged to the Republican Party and was said to follow a policy of laissez-faire, which is hard to believe for me, knowing that the commerce department’s budget had more than doubled under Hoover and the number of bureaucrats also increased. Now, let’s have a look at what Hoover’s policy was like indeed:

From the day of his assumption of office Hoover started to regulate a lot of industries with the aim to reduce “destructive competition”. This way of thinking already shows that Hoover’s policy had nothing to do with laissez-faire, because the competition provided by a free market economy is characteristic and elementary for the Austrian economic school of thoughts. It is one of the most important capitalist lessons that competition is the source of any imaginable wealth, since wherever there is competition in the economy, companies will struggle for the consumer’s dollar by providing a better or a cheaper product for the consumer, this again leads to the incentive to innovate products and production methods. In short, competition makes companies more efficient and thus creates jobs and great prosperity.

Uncategorized Capitalism, Great Depression, Laissez-Faire

Is the concern about another Great Depression realistic or do people panic without a reason? The fact of the matter is, anyhow, that a lot of those who wanted to save money for old age by investing in stocks have lost about everything and even people who saved money at the banks are worried about not getting it back, or at least not all of it. And this is not nearly all, since a lot of companies will have to dismiss workers because of the Financial Crisis and therefore a large number of people fear to lose their jobs.

The more severe the current Financial Crisis becomes the more enthusiastic people look for a scapegoat and the easiest way to find it is believing the media that have been telling us about the managers and supervisory boards having done a bad job and capitalism making it possible. I don’t want to deny those mistakes but I believe that this is only a little part of it and by its own could never cause a Financial Crisis of such an extent. That’s why I want to go deeper into all the different causes of the current Financial Crisis, which everyone should know about before making hasty judgements and above all, I want to find out whether the Financial Crisis is a product of capitalism.

Of course, the whole situation gives grounds for harsh discussions about how to deal with the current problem not only to politicians but also to big parts of the population of all the countries that are affected. Governments all over the world have already passed reflationary programs, which are approved of by some experts but sharply criticized by others. They are very expensive for the tax payer while their effectiveness is questionable. Is it right to let the tax payer pay the bill for the mistakes that have been made? Is there any other choice at all? Is a solution that helps the economy particularly well preferable to one that distributes the burden in a chiefly fair way? How far is it possible to have both at the same time? And finally, which is the most effective, the fairest, the best solution? These are the questions millions of people take a close look at these days and so do I in this work.

Uncategorized Capitalism, Financial Crisis, Great Depression, Reflationary Programs