Economist Paul Krugman argues the United States is about to enter into its third great depression. Although it is beginning to look like Krugman is correct about the possibilities of an economic downturn, his history is wrong. The United States has suffered through three great depressions already. If he is right about the coming depression, then it would be America’s fourth, and not third, great depression. Each incident was part of a global slowdown and included bank failures, speculation, and a helpless government.
The United States economy goes through boom and bust cycles. In 1873, it hit rock bottom. In Europe, the Austria-Hungarian Empire suffered a series of banking failures. This caused a ripple effect throughout the globe. At the same time, American railroad companies expanded too quickly. The businesses which appeared to make money off the railroad expansion failed. Since the rails expanded too quickly and the other businesses did not receive a quick return on their investment, things went south. At the same time, U.S. government policy depressed the value of silver which decimated the western economies. A series of bank failures followed. The depression ended in 1879.
Twenty years later, the country experienced a similar downturn. The Panic of 1893 was the second worst depression in American history. Once again, railroads over expanded. Companies began buying each other up which overextended them. On top of this, a drought wiped out many farmers. Plus, high government tariffs, and a run on the gold supply that resulted from government policy, created a disaster. Banks and railroads failed. The depression ended in 1897.
The federal government left poor relief to the states and did little to ease the pain during the Panics of 1873 and 1893. When the next depression hit, the federal government responded. In 1929, the stock market crashed signaling the Great Depression’s arrival. During the twenties, consumers purchased everything they could. By the end of the decade, companies overproduced goods. By this point, people stopped buying. They either had everything they wanted or were so overextended with credit that they could not afford to purchase new goods.
While American consumers stopped buying, Germany could no longer pay their war reparations. Following the war, a ridiculous cycle appeared. Americans lent money to Germany. The Germans made reparation payments to Britain and France. Britain and France paid their war debt to America. Once this cycle broke, the entire international system floundered. With less money in circulation, Europeans stopped buying American goods and American banks stopped receiving debt payments from Europe.
Once the Great Depression broke, Herbert Hoover attempted to alleviate the suffering. He did more than any other president before him. His efforts were later dwarfed by the New Deal. Both Hoover and Roosevelt failed to end the depression. As the government lost revenue, they raised tariffs to protect industry and increase the coffers. This made the depression worse. The Great Depression ended when the United States entered World War II.
Many believed New Deal regulations protected the economy from another great depression. In 2000, the congress repealed some of those restrictions. This led to derivative speculation which helped weaken the economy. At the same time, the housing market burst. In the late 1990s, the government ordered lenders to provide loans to low income applicants. Lenders were happy to comply. Eventually, these homeowners could no longer pay their mortgages. This led to a foreclosure crisis. Banks and other businesses began to collapse. In late 2008, the Bush Administration, with the blessing of the incoming Obama Administration, bailed out the banks. This saved the country from a repeat of the thirties.
Two years later, the economy remains mired in a slow recovery. Some believe the recession never ended. Others believe it ended, but the country is going right back into recession. This would be the first so-called “double dip recession” in history. A third group, led by liberal economist Krugman and conservative economist Art Laffer, believe a depression is inevitable.
There are several reasons for the gloomy economic outlook. The stimulus failed miserably. The housing market remains depressed, people aren’t buying goods, factory orders are down, unemployment remains high, and other economic indicators are poor. Overseas, China’s economy is slowing, the Greek economy collapsed, and the European Union might not be far behind. European spending is untenable. The welfare state has finally reached its limits. Likewise, American deficits have reached crisis proportions and the recent passage of health care has stopped any recovery cold. At the same time, both parties continue to play politics with unemployment relief thus further restricting buying power. As a result, the economy is on the verge of complete collapse.
Paul Krugman speaks of America’s three great depressions. He missed one. In 1873, 1893, and 1929, the country entered into depression economies. Some believe this is about to happen again in the near future. History provides no guideline for the length of these events. The last one lasted twelve years, forced Americans into a barter economy, and ended with Pearl Harbor. The other two ended as the boom cycle returned.