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Al Jacobs
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A. B. Jacobs is a professional investor with four decades of first-hand involvement in intricate business and investment activities.

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Welcome to the Great Depression Welcome to the Great Depression - Article by Al Jacobs

October 10 - On Monday, September 20, 2010, Americans awoke to learn that the “Great Recession,” plaguing the economy over the prior several years, had ended. Of even greater consequence, its official end occurred in June 2009, fifteen months earlier. The source of this welcome news: none other than the National Bureau of Economic Research (NBER), the nation’s most prestigious nonprofit research organization dedicated to studying the science and empirics of the American economy.

In case you’re unfamiliar with the NBER, it’s the largest economics research organization in the United States. Founded in 1920, it boasts sixteen of the thirty-one American winners of the Nobel Prize in Economics to have been associates. Included among its members are Federal Reserve Chairman Ben Bernanke, former Chairmen of the Council of Economic Advisors, Martin Feldstein and Harvey S. Rosen, and Christina Romer, outgoing Chairman of the Council of Economic Advisors and most recently selected to become a member of President Obama’s Economic Recovery Advisory Board. As you see, the declaration of the recession’s end is not the work of an obscure economics professor or a vote-seeking politician. Rather, it’s the official proclamation of those persons duly anointed as the nation’s economic hierarchy. By virtue of their august status, they define what constitutes a recession. Its traditional definition as “two consecutive quarters of shrinking gross domestic product (GDP)” can be ignored. In its place is substituted “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” With the ability to declare what constitutes a recession, it’s a snap to decide when it starts and when it ends. I’ve long contended that if I get to set the rules, I can rationalize an award of the Nobel Peace Prize to Osama Bin Laden.

This gets us to an oft-asked question: What’s in a name? The term “Great Recession” really doesn’t cut it. In reality, we’re well into another “Great Depression.” Let me give you a brief backwards glimpse. The United States entered its first major financial malaise following the Panic of 1819, which marked the end of the economic expansion after the War of 1812 and ushered in new financial policies which shaped economic development. The resulting foreclosures, bank failures, and unemployment certainly qualified as a depression. Despite President Monroe’s initial indifference, by 1820 he endorsed modest debtor relief and, with a compliant congress coupled with some sensible governmental policies, the economy recovered by 1822.

Our second economic cataclysm, kicked off by the Panic of 1873, proved far more severe. The failure of the Jay Cooke bank, followed quickly by that of Henry Clews, set off a chain reaction of bank failures and temporarily closed the New York stock market. Factories began to lay off workers as the United States slipped into depression. The effects of the panic quickly spread to New York, more slowly in Chicago, Virginia City, Nevada and San Francisco. The New York Stock Exchange closed for ten days starting September 20. Of the country's 364 railroads, 89 went bankrupt. A total of 18,000 businesses failed between 1873 and 1875. Unemployment reached 14% by 1876. Construction work halted, wages dropped, real estate values fell and corporate profits vanished. Corruption during the Grant incumbency (1869-1877), typified by the Fisk/Gould gold corner fiasco of 1869, prevented any sensible action to resolve the problems. Not until the presidency of Rutherford Hayes (1877-1891), and the end of the oppressive Civil War Reconstruction, did the nation recover. For your interest, the recessionary period at that time became known as the “Great Depression.”

Closer to the recollection of Americans is another “Great Depression,” the one triggered by the Stock Market Crash of October 1929. Economists and historians disagree as to what role the crash played in subsequent economic, social, and political events. The crash followed a speculative boom which took hold in the late 1920s. A significant number of persons borrowed money to buy stocks and by August 1929, with brokers routinely lending small investors more than two thirds of the face value of the stocks purchased. Speculation fueled further rises and created an economic bubble. On October 24, 1929, with the Dow just past its peak, the market finally collapsed and panic selling started.

This Great Depression was severe and worldwide. Its timing varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s. It proved to be the longest, most widespread, and deepest depression of the 20th century, with devastating effects in virtually every country, rich and poor. Personal income, tax revenue, profits and prices dropped while international trade plunged by one-half to two-thirds. Unemployment in the U.S. rose to 25%. As distinct from America’s two prior depressions, a new factor existed: the presence of an income tax, ratified February 3, 1913, as the Sixteenth Amendment to the U.S. Constitution. This gave the government an almost unlimited ability to control the economy . . . and control they did. In an attempt to tax its way to prosperity, the administrations of both Herbert Hoover (1929-1933) and Franklin Roosevelt (1933-1945) oversaw massive increases in income tax rates. Enacted in 1913, with two established rates, 1% and 6%, it rose by 1945 to a top marginal bracket of 91%. It’s no wonder the private sector never regained its footing during the 1930s. Only the advent of World War II swept away the government’s anti-depression agencies and inter-structure. However, not until Roosevelt’s successor, Harry Truman (1945-1953), left office, and President Dwight Eisenhower (1953-1961) ended such policies as wage, price, and rent controls (admittedly Truman changed the term from control to stabilization, but the effect remained the same) and instituted a first step in tax reduction, did the economy again begin to prosper.

Which brings us to the here and now. We are today witnessing a repeat of the 1930s. Just as George Bush emulated Herbert Hoover, Barack Obama is following in the footsteps of Franklin Roosevelt, and with the same effect. The government is in direct competition with its citizens as it dips deeper and deeper into their pockets to fund programs indiscriminately thrown together. The legislation commonly known as Obamacare, signed into law in March 2010, is a prime example of what is transpiring. Disguised as health care reform, it’s actually a massive tax increase designed to transfer all health control to the federal government. Once again we discover the nation cannot be taxed into prosperity. If President Obama and his confederates in congress are able to pull it off, they will transform America into a government-run state in which no person’s assets are safe. Until Americans are once again permitted to retain a meaningful portion of their earnings, we’ll not see an end to this “Great Depression.”.


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Al Jacobs has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting On the Money Trail


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