There are any number of theories as to what caused the Great Depression, but no matter which particular school you adhere to, there are the facts, and as Melvin Laird (and Sen. Moynihan) were both fond of saying, ‘we are all entitled to our own opinion, but we aren’t entitled to our own facts.’
And the pertinent facts of the great depression are these:
There was a huge over-capacity left over from World War I. During the war production of a whole host of goods was accelerated to ‘feed’ the voracious appetite of modern nations at war. Particularly in the United States many factories had been built and when the US joined the war, the rapid build-up of the army, coupled with the surge in production, resulted in very low unemployment.
Following the war the armies were demobilized around the world, and wartime production ended. The factories switched to producing other goods (or closed, in some cases), there was a rise in unemployment and economies slowed. In Germany as a result of the peace treaty reparations resulted in factories being disassembled and Germany moved toward collapse and revolution.
Over the course of the following several years every country went through a slow-down and, with the exception of Germany, a recovery. Germany’s economy went through a prolonged collapse, resulting in the infamous inflation of the Weimar Republic.
As economies recovered and grew, competition also grew, and the inherent problem of over capacity resident in all these factories resulted in an increasing efforts to seek new markets to sell goods, that is, export excess goods to generate additional revenue. Two actions followed over the course of the years from 1926 to 1929: a series of strong trade tariffs were passed by a number of countries (the US Hoot-Smalley Act was one of the strongest) to protect over-production, and government spending increased around the world.
While there were a number of other events and poor decisions by a number of world leaders that hastened the onset of the depression, the course had already been set: substantial over capacity and inventory; restrictive and damaging tariff and trade restrictions; and excessive government spending.
It was not until the US began an aggressive war-production effort in 1940 that the US unemployment rate began to show substantial reductions. It is worth noting that at the beginning of 1940 the unemployment rate was still nearly 19% but it fell throughout that year as FDR began the massive military build-up as he prepared for US involvement in World War II. The drop in unemployment was not the product of any of the works programs begun during the depression.
For those with a yen for some statistics, here are some numbers:
Year Unemployment Rate
1920 5.2%
1928 4.2
1930 8.6
1932 23.6
1934 21.7
1936 16.9
1938 19.0
1940 14.6
1942 4.7
1944 1.2
Why is all this important today and what does it have to do with leadership?
Because several points need to be made.
The first is that there isn’t going to be a depression. Before I go any further, let me define what I mean when I say that: we are not going to have 15 – 20% unemployment, substantial negative growth over a several year period, inadequate food supplies and the similar terrible litany of human tragedies that marked the United States in the 1930s. This does not mean that we can’t have hard times, or that there won’t be a few more spots on the planet that won’t suffer some severe economic conditions, but we won’t see a repeat of that situation.
Moreover, neither the US nor the rest of the world has the massive over-capacity or the massive inventory overhang that we all faced in 1929. Nor does the world have a situation such as the great dust-bowl brewing again. There are other problems, but none that look as severe as that.
Second, the world has shown some sanity and there are fewer, and substantially smaller tariffs on international trade. The absence of these two items alone makes the possibility of a true depression, a la the 1930s, very unlikely.
Why then didn’t the Bush administration discuss this? Why hasn’t the Obama administration discussed this? The closest anyone came was when McCain stated that despite the credit crunch, the fundamentals of the economy remain sound. He was, ‘of course,’ roundly criticized for this remark by many. Obama then said the same thing in March (for which he then received rave reviews). But no one has gone on to explain himself.
The fact is that there are many elements of the US economy that are, at the fundamental level, sound. The problems they have are serious, but ‘the patient isn’t going to die.’ And so, despite the problems besetting certain slices of the economy, and as terrible as it is to be part of those weaker components of the economy, there isn’t going to be a depression. Real leaders would and should be communicating this fact.
A third point needs to be made, though it is, and always will be, unpopular. The third point is simply this: bad things will happen. Claims by this or that leading politician that we are going to prevent this ‘cycle of boom and bust’ should be met with at a minimum great skepticism, and more appropriately hoots and hollers from the back row. Bad things will happen, lots of them. There will be a massive earthquake in California. There will be a flu epidemic. There will be a major recession. There will be more wars. There will be more terror attacks. Will these all happen this year? No, at least not all of them. Will they happen within 5 years? Maybe. Will they happen within the next 30 years? Probably. Welcome to the real world.
So, what’s the lesson?
Leadership is not about magic: it is about communicating. If our leaders think they can stand up and say ‘XYZ’ and the majority will agree, they will probably be right a third of the time. A third of the time they’ll probably get a half to agree with them, and a third of the time no one will agree with them. But, if they actually explain ‘Why’ they will find a lot more people willing to listen to them.
We have a great many ‘leaders’ today who believe that communicating means smooth delivery and glib sound-bites. Sadly, many in the press believe this as well.* Leaders should tell their followers what they are doing and WHY. If they don’t, it is reasonable to believe that either they – the leaders – don’t know why, or, if they do, the leader recognizes that those who follow won’t like the real reason. Either way, they should insist the leader explain why.
So if we have a recovery starting just 100 days or so into a new administration,
a) It isn’t that great a recession (unfortunately, it doesn’t look like we really have a recovery taking off)
b) The reason why this is an issue of leadership is that leaders need to explain to their followers.
Explaining isn’t pontificating, and it isn’t simple pronouncements. We need the President and other key figures – in and out of government – to stand up and explain what is happening and why and where it will lead. Leadership requires honesty and clarity. Explain both the ‘good and other’ of these actions, not simply what will happen, but why.
_________________________________________________________
*It’s also true that most reporters have little to no experience leading and, because of the nature of their business, don’t recognize the difference between good leaders and poor ones, but that is the subject of a future article.
And the pertinent facts of the great depression are these:
There was a huge over-capacity left over from World War I. During the war production of a whole host of goods was accelerated to ‘feed’ the voracious appetite of modern nations at war. Particularly in the United States many factories had been built and when the US joined the war, the rapid build-up of the army, coupled with the surge in production, resulted in very low unemployment.
Following the war the armies were demobilized around the world, and wartime production ended. The factories switched to producing other goods (or closed, in some cases), there was a rise in unemployment and economies slowed. In Germany as a result of the peace treaty reparations resulted in factories being disassembled and Germany moved toward collapse and revolution.
Over the course of the following several years every country went through a slow-down and, with the exception of Germany, a recovery. Germany’s economy went through a prolonged collapse, resulting in the infamous inflation of the Weimar Republic.
As economies recovered and grew, competition also grew, and the inherent problem of over capacity resident in all these factories resulted in an increasing efforts to seek new markets to sell goods, that is, export excess goods to generate additional revenue. Two actions followed over the course of the years from 1926 to 1929: a series of strong trade tariffs were passed by a number of countries (the US Hoot-Smalley Act was one of the strongest) to protect over-production, and government spending increased around the world.
While there were a number of other events and poor decisions by a number of world leaders that hastened the onset of the depression, the course had already been set: substantial over capacity and inventory; restrictive and damaging tariff and trade restrictions; and excessive government spending.
It was not until the US began an aggressive war-production effort in 1940 that the US unemployment rate began to show substantial reductions. It is worth noting that at the beginning of 1940 the unemployment rate was still nearly 19% but it fell throughout that year as FDR began the massive military build-up as he prepared for US involvement in World War II. The drop in unemployment was not the product of any of the works programs begun during the depression.
For those with a yen for some statistics, here are some numbers:
Year Unemployment Rate
1920 5.2%
1928 4.2
1930 8.6
1932 23.6
1934 21.7
1936 16.9
1938 19.0
1940 14.6
1942 4.7
1944 1.2
Why is all this important today and what does it have to do with leadership?
Because several points need to be made.
The first is that there isn’t going to be a depression. Before I go any further, let me define what I mean when I say that: we are not going to have 15 – 20% unemployment, substantial negative growth over a several year period, inadequate food supplies and the similar terrible litany of human tragedies that marked the United States in the 1930s. This does not mean that we can’t have hard times, or that there won’t be a few more spots on the planet that won’t suffer some severe economic conditions, but we won’t see a repeat of that situation.
Moreover, neither the US nor the rest of the world has the massive over-capacity or the massive inventory overhang that we all faced in 1929. Nor does the world have a situation such as the great dust-bowl brewing again. There are other problems, but none that look as severe as that.
Second, the world has shown some sanity and there are fewer, and substantially smaller tariffs on international trade. The absence of these two items alone makes the possibility of a true depression, a la the 1930s, very unlikely.
Why then didn’t the Bush administration discuss this? Why hasn’t the Obama administration discussed this? The closest anyone came was when McCain stated that despite the credit crunch, the fundamentals of the economy remain sound. He was, ‘of course,’ roundly criticized for this remark by many. Obama then said the same thing in March (for which he then received rave reviews). But no one has gone on to explain himself.
The fact is that there are many elements of the US economy that are, at the fundamental level, sound. The problems they have are serious, but ‘the patient isn’t going to die.’ And so, despite the problems besetting certain slices of the economy, and as terrible as it is to be part of those weaker components of the economy, there isn’t going to be a depression. Real leaders would and should be communicating this fact.
A third point needs to be made, though it is, and always will be, unpopular. The third point is simply this: bad things will happen. Claims by this or that leading politician that we are going to prevent this ‘cycle of boom and bust’ should be met with at a minimum great skepticism, and more appropriately hoots and hollers from the back row. Bad things will happen, lots of them. There will be a massive earthquake in California. There will be a flu epidemic. There will be a major recession. There will be more wars. There will be more terror attacks. Will these all happen this year? No, at least not all of them. Will they happen within 5 years? Maybe. Will they happen within the next 30 years? Probably. Welcome to the real world.
So, what’s the lesson?
Leadership is not about magic: it is about communicating. If our leaders think they can stand up and say ‘XYZ’ and the majority will agree, they will probably be right a third of the time. A third of the time they’ll probably get a half to agree with them, and a third of the time no one will agree with them. But, if they actually explain ‘Why’ they will find a lot more people willing to listen to them.
We have a great many ‘leaders’ today who believe that communicating means smooth delivery and glib sound-bites. Sadly, many in the press believe this as well.* Leaders should tell their followers what they are doing and WHY. If they don’t, it is reasonable to believe that either they – the leaders – don’t know why, or, if they do, the leader recognizes that those who follow won’t like the real reason. Either way, they should insist the leader explain why.
So if we have a recovery starting just 100 days or so into a new administration,
a) It isn’t that great a recession (unfortunately, it doesn’t look like we really have a recovery taking off)
b) The reason why this is an issue of leadership is that leaders need to explain to their followers.
Explaining isn’t pontificating, and it isn’t simple pronouncements. We need the President and other key figures – in and out of government – to stand up and explain what is happening and why and where it will lead. Leadership requires honesty and clarity. Explain both the ‘good and other’ of these actions, not simply what will happen, but why.
_________________________________________________________
*It’s also true that most reporters have little to no experience leading and, because of the nature of their business, don’t recognize the difference between good leaders and poor ones, but that is the subject of a future article.
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