A rather fatuous campaign to “Make the Banks Lend” is reminiscent of claims that a “capital strike” was undermining America’s recovery from the Great Depression in the 1930s. President Franklin D Roosevelt actually ordered a criminal investigation of the alleged conspiracy to withhold investment – which, predictably, found absolutely no evidence that such a thing existed.
The very notion of a “capital strike” shows a lack of understanding of the nature of money. There were and are no men in top hats hoarding piles of spare banknotes. Investment is all about confidence and credit and a careful calculation of risk and reward.
It was Roosevelt’s own policies of increasing both tax and national debt that discouraged investment. They reduced the amount of money available for investment in the private sector, and the government’s debt itself sucked up what credit there was. Risk was increased at the same that reward was reduced by taxing any profits that could be made.
FDR is often given credit for saving America from the Great Depression, but there is a lot of evidence to suggest that he prolonged it*. After all there have been about two dozen major crises in the 300 odd years of modern capitalism, but in most cases the markets showed remarkable powers of recovery: only the 1930s saw a whole decade of continuing and widespread suffering. There was a distinct and avoidable “double dip” recession under FDR.
Moreover, although direct comparisons are not as easy as they are today in our age of greater economic integration, the statistical evidence suggests that the American recovery in the 1930s was far more sluggish than that in other developed economies, including the UK. In the end, it was not FDR’s policies but war profiteering that dragged the USA out of the Depression – several years late. Given that unpleasant truth, no wonder most Americans would rather give the credit to Roosevelt.
All this history is important because President Obama models himself on FDR. He obviously sees clearly how FDR’s strategy of gesturing at taxing “the rich”, while spending massively on credit, led to political success. Does he appreciate the economic price of that strategy? If so, does he have the strength of character to resist it? Will his response to this week’s “super committee” proposals – or lack thereof – be principles or politics?
*NOTE: in the interests of partisan fairness we should point out that the Great Depression was itself caused, at least in part, by the foolish imposition of tariffs by the previous Republican Administration. Roosevelt – to his credit – opposed those tariffs at the time, but did not reverse them later when he was in power.