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  1. 1. Mackinac Center for Public Policy | Great Myths of the Great Depression 1 Great “HERBERT HOOVER believed government should play no role in the economy.” Myths “GOVERNMENT PROGRAMS helped lower unemployment by of the putting many Americans to work.” Great “FRANKLIN ROOSEVELT’S ‘New Deal’ saved America from the failure of free-market capitalism.” Depression This edition is a joint project of the Mackinac Center for Public Policy These and other myths are dispelled by the facts in this and the Foundation for Economic Education essay by economist Lawrence W. Reed
  2. 2. Mackinac Center for Public Policy | Great Myths of the Great Depression 2 To James M. Rodney a great friend of truth, character and liberty Great Myths of the Great Depression by Lawrence W. Reed. Original edition printed in 1981. This edition was printed in 2010 as a joint project of the Mackinac Center and the Foundation for Economic Education.
  3. 3. Mackinac Center for Public Policy | Great Myths of the Great Depression 1Great Myths of the Great DepressionS tudents today are often given a skewed account of the Great Depression of 1929-1941 that condemns free-market capitalism as the cause of, and promotes government intervention as the solution to, the economic hardships of the era. In this essay based on a popular lecture, MackinacCenter for Public Policy President Lawrence W. Reed debunks the conventional view and traces thecentral role that poor government policy played in fostering this legendary catastrophe. four workers was out of a job at Introduction the Depression’s nadir, and uglyMany volumes have been written rumors of revolt simmered for theabout the Great Depression of first time since the Civil War.1929-1941 and its impact on thelives of millions of Americans. “The terror of the Great CrashHistorians, economists and has been the failure to explain it,”politicians have all combed the writes economist Alan Reynolds. THE GREAT DEPRESSION devastated everywreckage searching for the “black “People were left with the part of America, even its smallest” that will reveal the cause of feeling that massive economicthe calamity. Sadly, all too many contractions could occur at of capitalism, the stock market,of them decide to abandon their any moment, without warning, crashed and dragged Americasearch, finding it easier perhaps without cause. That fear has into depression. Presidentto circulate a host of false and been exploited ever since as the Herbert Hoover, an advocateharmful conclusions about the major justification for virtually of “hands-off,” or laissez-faire,events of seven decades ago. unlimited federal intervention economic policy, refused to useConsequently, many people in economic affairs.”1 the power of government andtoday continue to accept critiques conditions worsened as a result.of free-market capitalism that Old myths never die; they just It was up to Hoover’s successor,are unjustified and support keep showing up in economics Franklin Delano Roosevelt,government policies that are and political science textbooks. to ride in on the white horseeconomically destructive. Wi t h o n l y a n o c c a s i o n a l of government intervention exception, it is there you will find and steer the nation towardHow bad was the Great what may be the 20th century’s recovery. The apparent lessonDepression? Over the four years g re ate st my th: C apit ali sm to be drawn is that capitalismfrom 1929 to 1933, production at and the free-market economy cannot be trusted; governmentthe nation’s factories, mines and were responsible for the Great needs to take an active role inutilities fell by more than half. Depression, and only government the economy to save us fromPeople’s real disposable incomes inter vention brought about inevitable decline.dropped 28 percent. Stock prices America’s economic recovery.collapsed to one-tenth of their But those who propagate thispre-crash height. The number version of history might justof unemployed Americans rose A Modern Fairy Tale as well top off their remarksfrom 1.6 million in 1929 to 12.8 According to this simplistic by saying , “And Goldilocksmillion in 1933. One of every perspective, an important pillar found her way out of the forest,
  4. 4. Mackinac Center for Public Policy | Great Myths of the Great Depression 2Dorothy made it from Oz back There was already a longto Kansas, and Little Red Riding history of margin lending onHood won the New York State stock exchanges, and marginLottery.” The popular account of requirements — the sharethe Depression as outlined above of the purchase price paid inbelongs in a book of fairy tales cash — were no lower in theand not in a serious discussion late twenties than in the earlyof economic history. twenties or in previous decades. In fact, in the fall of 1928 margin People who argue that the free-market requirements began to rise, and THe Great, economy collapsed of its own weight in borrowers were required to pay Great,Great,Great the 1930s seem utterly unaware of the a larger share of the purchase Depression critical role played by the Federal Reserve System’s gross mismanagement of money price of the stocks.To properly understand the and of the time, it is factually The margin lending argumentappropriate to view the Great was disastrous intervention by doesn’t hold much water. MischiefDepression as not one, but four government, often in the form with the money and credit supply,consecutive downturns rolled into of political mismanagement of however, is another These four “phases” are:2 the money and credit supply. None of these depressions, Most monetary economists,I. Monetary Policy and the however, lasted more than four particularly those of the “Austrian Business Cycle years and most of them were School,” have observed the closeII. The Disintegration of the over in two. The calamity that relationship between money World Economy began in 1929 lasted at least supply and economic activity. three times longer than any of the When government inflates theIII. The New Deal country’s previous depressions money and credit supply, interestIV. The Wagner Act because the government rates at first fall. Businesses compounded its initial errors with invest this “easy money” in newThe first phase covers why the a series of additional and harmful production projects and a boomcrash of 1929 happened in the interventions. takes place in capital goods. Asfirst place; the other three show the boom matures, businesshow government intervention costs rise, interest rates readjustworsened it and kept the economy Central Planners Fail upward, and profits are a stupor for over a decade. Let’s at Monetary Policy The easy-money effects thus wearconsider each one in turn. A popular explanation for the off and the monetary authorities, stock market collapse of 1929 fearing price inflation, slow the concerns the practice of borrowing growth of, or even contract, the Phase I: money to buy stock. Many history money supply. In either case, The Business Cycle texts blithely assert that a frenzied the manipulation is enough toThe Great Depression was not the speculation in shares was fed by knock out the shaky supportscountry’s first depression, though excessive “margin lending.” But from underneath the economicit proved to be the longest. Marquette University economist house of cards.Several others preceded it. Gene Smiley, in his 2002 book “Rethinking the Great Depression” , One prominent interpretationA common thread woven through explains why this is not a fruitful of the Federal Reserve System’sall of those earlier debacles observation: actions prior to 1929 can be found
  5. 5. Mackinac Center for Public Policy | Great Myths of the Great Depression 3in “America’s Great Depression”by economist Murray Rothbard.Using a broad measure thatincludes currenc y, demandand time deposits, and otheringredients, he estimated that theFed bloated the money supply bymore than 60 percent from mid-1921 to mid-1929.3 Rothbardargued that this expansion ofmoney and credit drove interestrates down, pushed the stockmarket to dizzy heights, and gavebirth to the “Roaring Twenties.”Reckless money and credit growth Unemployment skyrocketed after Congress raised tariffs and taxes in the early 1930s and stayed high as policies of the Roosevelt administration discouraged investment and recoveryconstituted what economist during the rest of the decade.Benjamin M. Anderson called“the beginning of the New Deal”4 prices lower than they would bank took further deflationary— the name for the better-known have otherwise been. action by aggressively sellingbut highly interventionist policies gover nment s e c ur itie s forthat would come later under Regarding Fed policy, free- months after the stock marketPresident Franklin Roosevelt. market economists who differ on crashed. For the next three years,However, other scholars raise the extent of the Fed’s monetary the money supply shrank by 30doubts that Fed action was expansion of the early and mid- percent. As prices then tumbledas inflationary as Rothbard 1920s are of one view about throughout the economy, thebelieved, pointing to relatively what happened next: The central Fed’s higher interest rate policyflat commodity and consumer bank presided over a dramatic boosted real (inflation-adjusted)prices in the 1920s as evidence contraction of the money supply rates dramatically.that monetary policy was not so that began late in the decade. Thewildly irresponsible. federal government’s responses Th e m o s t c o m p r e h e n s i v e to the resulting recession took chronicle of the monetar ySubstantial cuts in high a bad situation and made it far, policies of the period can bemarginal income tax rates in far worse. found in the classic work of Nobelthe Coolidge years certainly Laureate Milton Friedman andhelped the economy and may his colleague Anna Schwartz,have ameliorated the price The Bottom Drops Out “A Monetary History of the Unitede f f e c t o f Fe d p o l i c y. Ta x By 1928, the Federal Reserve States”, 1867-1960. Friedman andreductions spurred investment was raising interest rates and Schwartz argue conclusively thatand real economic growth, choking off the money supply. the contraction of the nation’swhich in turn yielded a burst of For example, its discount rate money supply by one-thirdtechnological advancement and (the rate the Fed charges member between August 1929 and Marchentrepreneurial discoveries of banks for loans) was increased 1933 was an enormous drag oncheaper ways to produce goods. four times, from 3.5 percent to the economy and largely the resultThis explosion in productivity 6 percent, between January 1928 of seismic incompetence by theundoubtedly helped to keep and August 1929. The central Fed. The death in October 1928
  6. 6. Mackinac Center for Public Policy | Great Myths of the Great Depression 4of Benjamin Strong, a powerful Then, on October 3, political forces for higher trade-figure who had exerted great stocks suffered their worst damaging tariffs were makinginfluence as head of the Fed’s pummeling of the ye ar. gains on Capitol Hill.New York district bank, left the Margin calls went out; someFed floundering without capable traders grew apprehensive. The stock market crash was only aleadership — making bad policy But the next day, prices rose reflection — not the direct causeeven worse.5 again and thereafter seesawed — of the destructive government for a fortnight. policies that would ultimatelyAt first, only the “smart” money produce the Great Depression:— the Bernard Baruchs and the The real crunch began on The market rose and fell in almostJoseph Kennedys who watched Wednesday, October 23, with direct synchronization with whatthings like money supply and what one observer called “a the Fed and Congress were doing.other government policies — Niagara of liquidation.” Six And what they did in the 1930ssaw that the party was coming million shares changed hands. ranks way up there in the annalsto an end. Baruch actually The industrial average fell 21 of history’s greatest follies.began selling stocks and buying points. “Tomorrow, the turnbonds and gold as early as will come,” brokers told one Buddy, Can You1928; Kennedy did likewise, another. Prices, they said, hadcommenting, “only a fool holds been carried to “unreasonably Spare $20 Million?out for the top dollar.”6 low” levels. Black Thursday shook Michigan harder than almost any otherThe masses of investors But the next day, Black state. Stocks of auto and miningeventually sensed the change Thursday, stocks were dumped companies were hammered. Autoa t t h e Fe d a n d t h e n t h e in even heavier selling ... the production in 1929 reached anstampede began. In a special ticker fell behind more than all-time high of slightly moreissue commemorating the 50th 5 hours, and finally stopped than 5 million vehicles, thenanniversary of the stock market grinding out quotations at quickly slumped by 2 million incollapse, U.S. News & World 7:08 p.m.7 1930. By 1932, near the deepestReport described it this way: point of the Depression, they had At their peak, stocks in the Dow fallen by another 2 million to just Actually the Great Crash Jones Industrial Average were 1,331,860 — down an astonishing was by no means a one- selling for 19 times earnings 75 percent from the 1929 peak. day affair, despite frequent — somewhat high, but hardly references to Black Thursday, what stock market analysts Thousands of investors October 24, and the following regard as a sign of inordinate everywhere, including many week’s Black Tuesday. As speculation. The distortions in well-known people, were hit early as September 5, stocks the economy promoted by the hard in the 1929 crash. Among were weak in heavy trading, Fed’s monetary policy had set the them was Winston Churchill. after having moved into new country up for a recession, but He had invested heavily in high ground two days earlier. other impositions to come would American stocks before the crash. Declines in early October soon turn the recession into a Afterward, only his writing skills were calle d a “desirable full-scale disaster. As stocks took and positions in government correction.” The Wall Street a beating, Congress was playing restored his finances. Journal, predicting an autumn with fire: On the very morning rally, noted that “some stocks of Black Thursday, the nation’s Clarence Birdseye, an early rise, some fall.” newspapers reported that the developer of packaged frozen
  7. 7. Mackinac Center for Public Policy | Great Myths of the Great Depression 5foods, had sold his business for$30 million and put all his moneyinto stocks. He was wiped out.William C. Durant, founderof General Motors, lost morethan $40 million in the stockmarket and wound up a virtualpauper. (GM itself stayed in theblack throughout the Depressionunder the cost-cutting leadershipof Alfred P. Sloan.) President Herbert Hoover is mistakenly presented in standard history texts as a laissez- PhaSe II: faire president, but he signed into law so many costly and foolish bills that one of Franklin Disintegration of the Roosevelt’s top aides later said that “practically the whole New Deal was extrapolated from programs that Hoover started.” World EconomyThough modern myth claims that free-market philosophy? His 1930. It came on top of thethe free market “self-destructed” opponent in the 1932 election, Fordney-McCumber Tariff ofin 1929, government policy was Franklin Ro ose velt , didn’t 1922, which had already putthe debacle’s principal culprit. If think so. During the campaign, American agriculture in a tailspinthis crash had been like previous Roosevelt blasted Hoover for during the preceding decade. Theones, the hard times would have spending and taxing too much, most protectionist legislationended in two or three years at boosting the national debt, in U.S. history, Smoot-Hawleythe most, and likely sooner than choking off trade, and putting virtually closed the bordersthat. But unprecedented political millions on the dole. He accused to foreign goods and ignitedbungling instead prolonged the the pre sident of “re ckle ss a vicious international trademisery for over 10 years. and extravagant” spending, war. Professor Barry Poulson of thinking “that we ought to describes the scope of the act:Unemployment in 1930 averaged center control of everythinga mildly recessionary 8.9 percent, in Washington as rapidly as The act raised the rates onup from 3.2 percent in 1929. It possible,” and of presiding the entire range of dutiableshot up rapidly until peaking out over “the greatest spending commodities; for example,at more than 25 percent in 1933. administration in peacetime the average rate increasedUntil March of 1933, these were in all of history.” Roosevelt’s from 20 percent to 34 percentthe years of President Herbert running mate, John Nance on agricultural products;Hoover — a man often depicted as Garner, charged that Hoover from 36 percent to 47a champion of noninterventionist, was “leading the country down percent on wines, spirits,laissez-faire economics. the path of socialism.”8 Contrary and beverages; from 50 to 60 to the conventional view about percent on wool and woolen Hoover, Roosevelt and Garner manufactures. In all, 887“ThE gReatest spendinG were absolutely right. tariffs were sharply increased administration in and the act broadened the list all of history” The crowning folly of the Hoover of dutiable commodities toDid Hoover really subscribe administration was the Smoot- 3,218 items. A crucial partto a “hands-off-the-economy,” Hawley Tariff, passed in June of the Smoot-Hawley Tariff
  8. 8. Mackinac Center for Public Policy | Great Myths of the Great Depression 6 was that many tariffs were for nearly a third of their markets. a specific amount of money Farm prices plummeted and tens rather than a percentage of of thousands of farmers went the price. As prices fell by bankrupt. A bushel of wheat that half or more during the Great sold for $1 in 1929 was selling for Depression, the effective a mere 30 cents by 1932. rate of these specific tariffs double d, incre a sing the With the collapse of agriculture, protection afforded under rural banks failed in record the act.9 numbers , dragging down hundreds of thousands of theirSmoot-Hawley was as broad as it customers. Nine thousand bankswas deep, affecting a multitude closed their doors in the Unitedof products. Before its passage, States between 1930 and 1933. Americans voted for Franklin Rooseveltclocks had faced a tariff of 45 The stock market, which had in 1932 expecting him to adhere to thepercent; the act raised that to Democratic Party platform, which called for regained much of the ground55 percent, plus as much as less government spending and regulation. it had lost since the previousanother $4.50 per clock. Tariffs October, tumbled 20 points onon corn and butter were roughly solve the nagging unemployment the day Hoover signed Smoot-doubled. Even sauerkraut was problem. But they ignored Hawley into law, and fell almosttariffed for the first time. Among an imp or tant pr inciple of without respite for the nextthe few remaining tariff-free international commerce: Trade two years. (The market’s high,goods, strangely enough, were is ultimately a two-way street; as measured by the Dow Jonesleeches and skeletons (perhaps if foreigners cannot sell their Industrial Average, was set onas a political sop to the American goods here, then they cannot Sept. 3, 1929, at 381. It hit itsMedical Association, as one wag earn the dollars they need to 1929 low of 198 on Nov. 13, thenwryly remarked). buy here. Or, to put it another rebounded to 294 by April 1930. way, government cannot shut off It declined again as the tariff billTariffs on linseed oil, tungsten, imports without simultaneously made its way toward Hoover’sand casein hammered the U.S. shutting off exports. desk in June and did not bottompaint, steel and paper industries, out until it reached a mere 41 tworespectively. More than 800 items years later. It would be a quarter-used in automobile production You Tax Me, I Tax You century before the Dow wouldwere taxed by Smoot-Hawley. Foreign companies and their climb to 381 again.)Most of the 60,000 people workers were f lattene d byemployed in U.S. plants making Smoot-Hawley’s steep tariff rates The shrinkage in world tradecheap clothing out of imported and foreign governments soon brought on by the tariff warswool rags went home jobless retaliated with trade barriers helped set the stage for Worldafter the tariff on wool rags rose of their own. With their ability War II a few years later. In 1929, theby 140 percent.10 to sell in the American market rest of the world owed American severely hampered, they curtailed citizens $30 billion. Germany’sOfficials in the administration their purchases of American Weimar Republic was strugglingand in Congress believed that goods. American agriculture to pay the enormous reparationsraising trade barriers would force was particularly hard hit. With bill imposed by the disastrousAmericans to buy more goods a stroke of the presidential pen, Treaty of Versailles. When tariffsmade at home, which would farmers in this country lost made it nearly impossible for
  9. 9. Mackinac Center for Public Policy | Great Myths of the Great Depression 7foreign businessmen to sell their government’s share of GNPgoods in American markets, soared from 16.4 percent to 21.5the burden of their debt s percent.12 Hoover’s agriculturalbecame massively heavier and bureaucracy doled out hundredsemboldened demagogues like of millions of dollars to wheatAdolf Hitler. “When goods don’t and cotton farmers even ascross frontiers, armies will,” warns the new tariffs wiped out theiran old but painfully true maxim. markets. His Reconstruction Finance Corporation ladled out billions more in business Free Markets or subsidies. Commenting decades Free Lunches? later on Hoover’s administration,Smoot-Hawley by itself should Rexford Guy Tugwell, one of thelay to rest the myth that Hoover architects of Franklin Roosevelt’swas a free market practitioner, policies of the 1930s, explained,but there is even more to the “We didn’t admit it at the time, butstory of his administration’s practically the whole New Deal President Franklin Roosevelt decriedinterventionist mistakes. Within was extrapolated from programs as selfish “economic royalists” those businessmen who opposed the burdensomea month of the stock market that Hoover started.”13 taxes and regulations of his “New Deal.”crash, he convened conferencesof business leaders for the Though Hoover at first did lower Compounding the error ofpurpose of jawboning them into taxes for the poorest of Americans, high tariffs, huge subsidies andkeeping wages artificially high Larry Schweikart and Michael deflationary monetary policy,even though both profits and Allen in their sweeping “A Patriot’s Congress then passe d andprices were falling. Consumer History of the United States: From Hoover signed the Revenue Actprices plunged almost 25 percent Columbus’s Great Discovery to of 1932. The largest tax increasebetween 1929 and 1933 while the War on Terror” stress that in peacetime history, it doublednominal wages on average he “offered no incentives to the the income tax. The top bracketdecreased only 15 percent — wealthy to invest in new plants to actually more than doubled,translating into a substantial stimulate hiring.” He even taxed soaring from 24 percent toincrease in wages in real terms, bank checks, “which accelerated 63 percent. Exemptions werea major component of the cost the decline in the availability of lowered; the earned incomeof doing business. As economist money by penalizing people for credit was abolished; corporateRichard Ebeling notes, “The writing checks.”14 and estate taxes were raised;‘high-wage’ policy of the Hoover new gift, gasoline and auto taxesadministration and the trade In September 1931, with the were imposed; and postal ratesunions ... succeeded only in money supply tumbling and were sharply hiked.pricing workers out of the labor the economy reeling from themarket, generating an increasing impact of Smoot-Hawley, the Can any serious scholar observecircle of unemployment.”11 Fed imposed the biggest hike the Hoover administration’s in its discount rate in history. massive economic interventionHoover dramatically increased Bank deposits fell 15 percent and, with a straight face, pronounceg o v e r n m e nt s p e n d i n g f o r within four months and sizable, the inevitably deleterious effectssubsidy and relief schemes. In deflationary declines in the as the fault of free markets?the space of one year alone, nation’s money supply persisted Schweikart and Allen survey somefrom 1930 to 1931, the federal through the first half of 1932. of the wreckage:
  10. 10. Mackinac Center for Public Policy | Great Myths of the Great Depression 8 By 1933, the numbers the sort of difference for which produced by this comedy the countr y had hoped. He of errors were staggering: started off on the wrong foot national unemploy ment when, in his inaugural address, rates reached 25 percent, but he blamed the Depression on within some individual cities, “unscrupulous money changers.” the statistics seemed beyond He said nothing about the role comprehension. Cleveland of the Fed’s mismanagement reported that 50 percent of its and little about the follies of labor force was unemployed; To many Americans, the National Recovery Congress that had contributed Toledo, 80 percent; and some Administration’s bureaucracy and mind- to the problem. As a result of states even averaged over 40 numbing regulations became known as the his efforts, the economy would “National Run Around.” percent. Because of the dual- linger in depression for the edged sword of declining budget, a sound gold currency “to rest of the decade. Adapting a revenues and increasing be preserved at all hazards,” the phrase from 19th century writer welfare demands, the burden removal of government from areas Henry David Thoreau, Roosevelt on the cities pushed many that belonged more appropriately famously declared in his address municipalities to the brink. to private enterprise and an end that, “We have nothing to fear Schools in New York shut to the “extravagance” of Hoover’s but fear itself.” But as Dr. Hans down, and teachers in Chicago farm programs. This is what Sennholz of Grove City College were owed some $20 million. candidate Roosevelt promised, explains, it was FDR’s policies Private schools, in many but it bears no resemblance to to come that Americans had cases, failed completely. One what President Roosevelt actually genuine reason to fear: government study found that delivered. by 1933 some fifteen hundred In his first 100 days, he swung colleges had gone belly-up, Washington was rife with both hard at the profit order. and book sales plummeted. fear and optimism as Roosevelt Instead of clearing away the Chicago’s library system did was sworn in on March 4, 1933 — prosperity barriers erected not purchase a single book in fear that the economy might not by his predecessor, he built a year-long period.15 recover and optimism that the new new ones of his own. He and assertive president just might struck in every known way make a difference. Humorist Will at the integrity of the U.S.Phase III: The New Deal Rogers captured the popular feeling dollar through quantitativeFranklin Delano Roosevelt won toward FDR as he assembled the increases and qualitativethe 1932 presidential election in a new administration: “The whole deterioration. He seized thelandslide, collecting 472 electoral country is with him, just so he does people’s gold holdings andvotes to just 59 for the incumbent something. If he burned down the subsequently devalued theHerbert Hoover. The platform Capitol, we would all cheer and say, dollar by 40 percent.17of the Democratic Party, whose well, we at least got a fire startedticket Roosevelt headed, declared, anyhow.”16 Frustrated and angered that“We believe that a party platform Roosevelt had so quickly andis a covenant with the people to thoroughly abandoned the “Nothing to fearbe faithfully kept by the party platform on which he wasentrusted with power.” It called for but fear itself” elected, Director of the Bureaua 25 percent reduction in federal Roosevelt did indeed make a of the Budget Lewis W. Douglasspending, a balanced federal difference, though probably not resigned after only one year on
  11. 11. Mackinac Center for Public Policy | Great Myths of the Great Depression 9the job. At Harvard Universityin May 1935, Douglas made itplain that America was facing amomentous choice: Will we choose to subject ourselves — this great country — to the despotism of bureaucracy, controlling our every act, destroying what equality we have attained, reducing us eventually to the condition of impoverished slaves of the state? Or will we This 1989 photo is of a bridge built from 1936-41 as part of a Works Progress Administration (WPA) project in Coleman County, Texas. Many Americans saw such projects as helpful, cling to the liberties for which without considering their high cost and the corruption that plagued the program. man has struggled for more than a thousand years? It is “banking holiday” on March He points out that “Almost all important to understand the 6 (which did not completely the failed banks were in states magnitude of the issue before end until nine days later) is still with unit banking laws” — laws us. ... If we do not elect to hailed as a decisive and necessary that prohibited banks from have a tyrannical, oppressive action by Roosevelt apologists. opening branches and thereby bureaucracy controlling our Friedman and Schwartz, however, diversifying their portfolios and lives, destroying progress, make it plain that this supposed reducing their risks. Powell depressing the standard cure was “worse than the disease.” writes: “Although the United of living ... then should it The Smoot-Hawley tariff and the States, with its unit banking laws, not be the function of the Fed’s unconscionable monetary had thousands of bank failures, Federal government under mischief were primary culprits Canada, which permitted branch a democracy to limit its in producing the conditions that banking, didn’t have a single activities to those which a gave Roosevelt his excuse to failure ...”20 Strangely, critics of democracy may adequately temporarily deprive depositors capitalism who love to blame the deal, such for example as of their money, and the bank market for the Depression never national defense, maintaining holiday did nothing to alter those mention that fact. law and order, protecting fundamentals. “More than 5,000 life and property, preventing banks still in operation when Congress gave the president the dishonesty, and ... guarding the holiday was declared did power first to seize the private the public against ... vested not reopen their doors when it gold holdings of American special interests?18 ended, and of these, over 2,000 citizens and then to fix the never did thereafter,” report price of gold. One morning, as Friedman and Schwartz.19 Roosevelt ate eggs in bed, heNew Dealing from the and Secretary of the Treasury Bottom of the Deck Economist Jim Powell of the Cato Henry Morgenthau decidedCrisis gripped the banking Institute authored a splendid to change the ratio betweensystem when the new president book on the Great Depression gold and paper dollars. Afterassumed office on March 4, 1933. in 2003, titled “FDR’s Folly: How weighing his options, RooseveltRoosevelt’s action to close the Roosevelt and His New Deal settled on a 21 cent price hikebanks and declare a nationwide Prolonged the Great Depression”. because “it’s a lucky number.”
  12. 12. Mackinac Center for Public Policy | Great Myths of the Great Depression 10In his diary, Morgenthau wrote, and imposing the nation’s first“If anybody ever knew how comprehensive minimum wagewe really set the gold price law in 1938. While to this daythrough a combination of lucky he gets a great deal of credit fornumbers, I think they would these two measures from thebe frightened.”21 Roosevelt also general public, many economistssingle-handedly torpedoed the have a different perspective. TheLondon Economic Conference minimum wage law prices many ofin 1933, which was convened the inexperienced, the young, theat the request of other major unskilled and the disadvantagednations to bring down tariff rates out of the labor market. (Forand restore the gold standard. example, the minimum wage provisions passed as part ofWashington and its reckless Michigan Senator Arthur Vandenberg another act in 1933 threw ancentral bank had already made argued that a sound economy could not be estimated 500,000 blacks outmincemeat of the gold standard restored through FDR’s punitive tax and of work).24 And current studies regulatory the early 1930s. Roosevelt’s and estimates reveal that Socialrejection of it removed most of Prohibition. The House approved Security has become such a long-the remaining impediments to a repeal measure on Tuesday, the term actuarial nightmare that itlimitless currency and credit Senate passed it on Thursday and will either have to be privatized orexpansion, for which the nation before the year was out, enough the already high taxes needed towould pay a high price in later states had ratified it so that the keep it afloat will have to be raisedyears in the form of a depreciating 21st Amendment became part of to the stratosphere.currency. Sen. Carter Glass put it the Constitution. One observer,well when he warned Roosevelt commenting on this remarkable Roosevelt secured passage ofin early 1933: “It’s dishonor, sir. turn of events, noted that of two the Agricultural AdjustmentThis great government, strong in men walking down the street at Act, which levied a new taxgold, is breaking its promises to the start of 1933 — one with a on agricultural processors andpay gold to widows and orphans gold coin in his pocket and the used the revenue to superviseto whom it has sold government other with a bottle of whiskey in the wholesale destr uctionbonds with a pledge to pay gold his coat — the man with the coin of valuable crops and cattle.coin of the present standard of would be an upstanding citizen Federal agents oversaw the uglyvalue. It is breaking its promise to and the man with the whiskey spectacle of perfectly good fieldsredeem its paper money in gold would be the outlaw. A year later, of cotton, wheat and corn beingcoin of the present standard of precisely the reverse was true. plowed under (the mules hadvalue. It’s dishonor, sir.”22 to be convinced to trample the In the first year of the New Deal, crops; they had been trained, ofThough he seized the country’s Roosevelt proposed spending $10 course, to walk between the rows).gold, Roosevelt did return billion while revenues were only Healthy cattle, sheep and pigs werebooze to America’s bars and $3 billion. Between 1933 and 1936, slaughtered and buried in massparlor rooms. On his second government expenditures rose by graves. Secretary of AgricultureSunday in the White House, he more than 83 percent. Federal debt Henry Wallace personally gaveremarked at dinner, “I think this skyrocketed by 73 percent. the order to slaughter 6 millionwould be a good time for beer.”23 baby pigs before they grew toThat same night, he drafted a FDR talke d Congress into full size. The administration alsomessage asking Congress to end creating Social Security in 1935 paid farmers for the first time
  13. 13. Mackinac Center for Public Policy | Great Myths of the Great Depression 11for not working at all. Even ifthe AAA had helped farmers bycurtailing supplies and raisingprices, it could have done so onlyby hurting millions of others whohad to pay those prices or make dowith less to eat.Blue Eagles, Red DucksPerhaps the most radical aspectof the New Deal was the NationalIndustrial Recovery Act, passedin June 1933, which created At the nadir of the Great Depression, half of American industrial production was idle as the economy reeled under the weight of endless and destructive policies from both Republicansa massive new bureaucracy and Democrats in Washington.called the National RecoveryAdministration. Under the NRA, dropped 25 percent. Benjamin to the manufacture of corsetsmost manufacturing industries M. Anderson writes, “NRA was and brassieres, covering morewere suddenly forced into not a revival measure. It was an than 2 million employers andgovernment-mandated cartels. antirevival measure. ... Through 22 million workers.” 26 ThereCodes that regulated prices and the whole of the NRA period were codes for the productionterms of sale briefly transformed industrial production did not of hair tonic, dog leashes, andmuch of the American economy rise as high as it had been in July even musical comedies. A Newinto a fascist-style arrangement, 1933, before NRA came in.”25 Jersey tailor named Jacob Magedwhile the NRA was financed by was arrested and sent to jail fornew taxes on the very industries The man Roosevelt picked the “crime” of pressing a suitit controlled. Some economists to direct the NRA effort was of clothes for 35 cents ratherhave estimated that the NRA General Hugh “Iron Pants” than the NRA-inspired “Tailor’sboosted the cost of doing business Johnson, a profane, red-faced Code” of 40 an average of 40 percent — not bully and professed admirer ofsomething a depressed economy Italian dictator Benito Mussolini. In “The Roosevelt Myth” historian ,needed for recovery. Thundere d Johnson, “May John T. Flynn described how Almighty God have mercy on the NRA’s partisans sometimesThe economic impact of the NRA anyone who attempts to interfere conducted “business”:was immediate and powerful. with the Blue Eagle” (the officialIn the five months leading up symbol of the NRA, which one The NRA was discoveringto the act’s passage, signs of senator derisively referred to as it could not enforce it srecovery were evident: factory the “Soviet duck”). Those who rules. Black markets grewemployment and payrolls had refused to comply with the NRA up. Only the most violentincreased by 23 and 35 percent, Johnson personally threatened police methods could procurerespectively. Then came the NRA, with public boycotts and “a enforcement . In Sidne yshortening hours of work, raising punch in the nose.” Hillman’s garment industrywages arbitrarily and imposing the code authority employedother new costs on enterprise. There were ultimately more than enforcement police. TheyIn the six months after the law 500 NRA codes, “ranging from roamed through the garmenttook effect, industrial production the production of lightning rods district like storm troopers.
  14. 14. Mackinac Center for Public Policy | Great Myths of the Great Depression 12 They could enter a man’s his State of the Union message factory, send him out, line up that any new such program his employees, subject them would be abolished within a to minute interrogation, take year. “The federal government,” over his books on the instant. said the president, “must and Night work was forbidden. shall quit this business of relief. Flying squadrons of these I am not willing that the vitality private coat-and-suit police of our people be further stopped went through the district at by the giving of cash, of market night, battering down doors T he S u pre m e Co u rt c a m e u n d e r baskets, of a few bits of weekly attack by President Roosevelt because it with axes looking for men declared important parts of the “New Deal” work cutting grass , raking who were committing the unconstitutional. FDR’s “court-packing” leaves, or picking up papers crime of sewing together a scheme contributed to the resumption of in the public parks.” Harr y economic depression in 1937. pair of pants at night. But Hopkins was put in charge of without these harsh methods people need to be regimented by the agency and later said, “I’ve many code authorities said powerful overlords in order to got four million at work but for there could be no compliance be saved.”29 God’s sake, don’t ask me what because the public was not they are doing.” The CWA came back of it.27 Alphabet commissars spent to an end within a few months the public’s money like it was but was replaced with another so much bilge. They were what te mp o r a r y rel i e f p ro g r a m The Alphabet influential journalist and social that evolved into the Works Commissars critic Albert Jay Nock had in Progress Administration, orRoosevelt next signed into law mind when he described the WPA , by 1935. It is knownsteep income tax increases on the New Deal as “a nation-wide, today as the very governmenthigher brackets and introduced State-managed mobilization of pro g ram that g ave r i s e toa 5 percent withholding tax inane buffoonery and aimless the new term, “boondoggle,”on corporate dividends. He commotion.”30 because it “produced” a lotsecured another tax increase in more than the 77,000 bridges1934. In fact, tax hikes became R o o s e v e l t ’s C i v i l Wo r k s and 116,000 buildings to whicha favorite policy of Roosevelt for Administration hired actors to its advocates loved to point asthe next 10 years, culminating give free shows and librarians evidence of its efficacy.31in a top income tax rate of 90 to catalog archives. It evenpercent. Sen. Arthur Vandenberg paid researchers to study the With good reason, critics oftenof Michigan, who opposed much history of the safety pin, hired referred to the WPA as “We Piddleof the New Deal, lambasted 100 Washington workers to Around.” In Kentucky, WPARoosevelt’s massive tax increases. patrol the streets with balloons workers catalogued 350 differentA sound economy would not be to frighten starlings away from ways to cook spinach. The agencyrestored, he said, by following public buildings, and put men employed 6,000 “actors” thoughthe socialist notion that America on the public payroll to chase the nation’s actors’ union claimedcould “lift the lower one-third tumbleweeds on windy days. only 4,500 members. Hundredsup” by pulling “the upper two- of WPA workers were used tothirds down.”28 Vandenberg also The CWA, when it was started collect campaign contributionscondemned “the congressional in the fall of 1933, was supposed for Democratic Party candidates.surrender to alphabet commissars to be a short-lived jobs program. In Tennessee, WPA workerswho deeply believe the American Roosevelt assured Congress in were fired if they refused to
  15. 15. Mackinac Center for Public Policy | Great Myths of the Great Depression 13donate 2 percent of their wages hires someone to catalog theto the incumbent governor. By many ways of cooking spinach, his1941, only 59 percent of the tax-supported paycheck cannotWPA budget went to paying be counted as a net increaseworkers anything at all; the rest to the economy because thewas sucked up in administration wealth used to pay him wasand overhead. The editors of simply diverted, not created.The New Republic asked, “Has Economists today must still battle[Roosevelt] the moral stature to this “magical thinking” every timeadmit now that the WPA was more government spending is Special powers granted to organizeda hasty and grandiose political proposed — as if money comes labor with the passage of the Wagner Act contributed to a wave of militant strikes and agesture, that it is a wretched not from productive citizens, but “depression within a depression” in 1937.failure and should be abolished?”32 rather from the tooth fairy.The last of the WPA’s projects was ‘a gang of half-educated peda-not eliminated until July of 1943. gogues, nonconstitutional “An astonishing lawyers, starry-eyed upliftersRoosevelt has been lauded for rabble of impudent and other such sorry wizards.’his “job-creating” acts such as nobodies” His New Deal was a ‘politicalthe CWA and the WPA. Many Roosevelt’s haphazard economic racket,’ a ‘series of stupendouspeople think that they helped re- interventions garnered credit from bogus miracles,’ with its ‘con-lieve the Depression. What they people who put high value on the stant appeals to class envyfail to realize is that it was the appearance of being in charge and and hatred,’ treating govern-rest of Roosevelt’s tinkering that “doing something.” Meanwhile, the ment as ‘a milch-cow withprolonged the Depression and great majority of Americans were 125 million teats’ and markedwhich largely prevented the job- patient. They wanted very much to by ‘frequent repudiations ofless from finding real jobs in the give this charismatic polio victim categorical pledges.’33first place. The stupefying roster and former New York governor theof wasteful spending generated benefit of the doubt. But Rooseveltby these jobs programs repre- always had his critics, and they Signs of Lifesented a diversion of valuable would grow more numerous as the The American economy was soonresources to politically motivated years groaned on. One of them was relieved of the burden of someand economically counterpro- the inimitable “Sage of Baltimore,” of the New Deal’s worst excessesductive purposes. H. L. Mencken, who rhetorically when the Supreme Court outlawed threw everything but the kitchen the NRA in 1935 and the AAA inA brief analogy will illustrate sink at the president. Paul Johnson 1936, earning Roosevelt’s eternalthis point. If a thief goes house sums up Mencken’s stinging but wrath and derision. Recognizingto house robbing everybody in often-humorous barbs this way: much of what Roosevelt did asthe neighborhood, then heads unconstitutional, the “nine oldoff to a nearby shopping mall Mencken excelled himself men” of the Court also threwto spend his ill-gotten loot, it is in attacking the triumphant out other, more minor actsnot assumed that because his FDR, whose whiff of fraudu- and programs which hinderedspending “stimulated” the stores at lent collectivism filled him recovery.the mall he has thereby performed with genuine disgust. He wasa national service or provided the ‘Fuhrer,’ the ‘Quack,’ sur- Freed from the worst of the Newa general economic benefit. rounded by ‘an astonishing Deal, the economy showed someLikewise, when the government rabble of impudent nobodies,’ signs of life. Unemployment
  16. 16. Mackinac Center for Public Policy | Great Myths of the Great Depression 14dropped to 18 percent in 1935, NRA and its labor codes. It against business. Businessmen,14 percent in 1936, and even aimed at crushing all employ- Roosevelt fumed, were obstacleslower in 1937. But by 1938, er resistance to labor unions. on the road to recovery. He blastedit was back up to nearly 20 Anything an employer might them as “economic royalists” andpercent as the economy slumped do in self-defense became an said that businessmen as a classagain. The stock market crashed “unfair labor practice” punish- were “stupid.”36 He followed up thenearly 50 percent between able by the Board. The law not insults with a rash of new punitiveAugust 1937 and March 1938. only obliged employers to deal measures. New strictures on theThe “economic stimulus” of and bargain with the unions stock market were imposed. A taxFranklin Delano Roosevelt’s New designated as the employees’ on corporate retained earnings,Deal had achieved a real “first”: representative; later Board de- called the “undistributed profitsa depression within a depression! cisions also made it unlawful tax,” was levied. “These soak-the- to resist the demands of labor rich efforts,” writes economist union leaders.34 Robert Higgs, “left little doubt Phase IV: that the president and his The Wagner Act Armed with these sweeping administration intended to pushThe stage was set for the 1937-38 new powers, labor unions went through Congress everythingcollapse with the passage of the on a militant organizing frenzy. they could to extract wealthNational Labor Relations Act Threats , boycotts , strikes , from the high-income earnersin 1935 — better known as the seizures of plants and widespread responsible for making the bulk“Wagner Act” and organized violence pushed productivity of the nation’s decisions aboutlabor’s “Magna Carta.” To quote down sharply and unemployment private investment.”37Sennholz again: up dramatically. Membership in the nation’s labor unions soared: During a period of barely two This law re volutionized By 1941, there were two and a months during late 1937, the American labor relations. It half times as many Americans market for steel — a key economic took labor disputes out of the in unions as had been the case barometer — plummeted from 83 courts of law and brought in 1935. Historian William E. percent of capacity to 35 percent. them under a newly created Leuchtenburg, himself no friend When that news emblazoned Federal agency, the National of free enterprise, observed, headlines, Roosevelt took an Labor Relations Board, which “Property-minded citizens were ill-timed nine-day fishing trip. became prosecutor, judge, and scared by the seizure of factories, The New York Herald-Tribune jury, all in one. Labor union incensed when strikers interfered implored him to get back to work sympathizers on the Board with the mails, vexed by the to stem the tide of the renewed further perverted this law, intimidation of nonunionists, Depression. What was needed, which already afforded legal and alarmed by flying squadrons said the newspaper’s editors, was immunities and privileges to of workers who marched, or a reversal of the Roosevelt policy labor unions. The U.S. thereby threatened to march, from city “of bitterness and hate, of setting abandoned a great achievement to city.”35 class against class and punishing of Western civilization, equality all who disagreed with him.”38 under the law. An Unfriendly Climate Columnist Walter Lippmann The Wagner Act, or National for Business wrote in March 1938 that “with Labor Relations Act, was From the White House on the almost no important exception passed in reaction to the heels of the Wagner Act came every measure he [Roosevelt] has Supreme Court’s voidance of a thunderous barrage of insults been interested in for the past
  17. 17. Mackinac Center for Public Policy | Great Myths of the Great Depression 15five months has been to reduce on the nation’s banks. Experience the war effort instead of into plantor discourage the production of has shown time and again that a expansion or consumer goods.wealth.”39 roller-coaster monetary policy Not until both Roosevelt and the is enough by itself to produce a war were gone did investors feelAs pointed out earlier in this roller-coaster economy. confident enough to “set in motionessay, Herbert Hoover’s own the postwar investment boom thatversion of a “New Deal” had hiked Still stinging from his earlier powered the economy’s return tothe top marginal income tax rate Supreme Court defeats, Roosevelt sustained prosperity.”42from 24 to 63 percent in 1932. tried in 1937 to “pack” the SupremeBut he was a piker compared to Court with a proposal to allow the This view gains support in thesehis tax-happy successor. Under president to appoint an additional comments from one of the country’sRoosevelt, the top rate was raised justice to the Court for every leading investors of the time,at first to 79 percent and then later sitting justice who had reached the Lammot du Pont, offered in 1937:to 90 percent. Economic historian age of 70 and did not retire. HadBurton Folsom notes that in this proposal passed, Roosevelt Uncertainty rules the tax1941 Roosevelt even proposed a could have appointed six new situation, the labor situation,whopping 99.5-percent marginal justices favorable to his views, the monetary situation, andrate on all incomes over $100,000. increasing the members of the practically every legal condition“Why not?” he said when an Court from 9 to 15. His plan failed under which industry mustadvisor questioned the idea.40 in Congress, but the Court later operate. Are taxes to go higher, began rubber-stamping his policies lower or stay where they are?After that confiscatory proposal after a number of opposing justices We don’t know. Is labor to befailed, Roosevelt issued an retired. Until Congress killed union or non-union? . . . Are weexecutive order to tax all income the packing scheme, however, to have inflation or deflation,over $25,000 at the astonishing business fears that a Court more government spending orrate of 100 percent. He also sympathetic to Roosevelt’s goals less? ... Are new restrictions topromoted the lowering of the would endorse more of the old be placed on capital, new limitspersonal exemption to only New Deal prevented investment on profits? ... It is impossible to$600, a tactic that pushed most and confidence from reviving. even guess at the answers.”43American families into paying atleast some income tax for the first Economic historian Robert Higgs Many modern historians tendtime. Shortly thereafter, Congress draws a close connection between to be reflexively anti-capitalistrescinded the executive order, but the level of private investment and distrustful of free markets;went along with the reduction of and the course of the American they find Roosevelt’s exercise ofthe personal exemption.41 economy in the 1930s. The power, constitutional or not, to relentless assaults of the Roosevelt be impressive and historicallyMeanwhile, the Federal Reserve administration — in both word and “interesting .” In sur veys, aagain seesawed its monetary deed — against business, property, majority consistently rankpolicy in the mid-1930s, first and free enterprise guaranteed FDR near the top of the list forup then down, then up sharply that the capital needed to jump- presidential greatness, so it isthrough America’s entry into start the economy was either taxed likely they would disdain theWorld War II. Contributing to the away or forced into hiding. When notion that the New Deal waseconomic slide of 1937 was this FDR took America to war in 1941, responsible for prolonging thefact: From the summer of 1936 he eased up on his anti-business Great Depression. But when ato the spring of 1937, the Fed agenda, but a great deal of the nationally representative polldoubled reserve requirements nation’s capital was diverted into by the American Institute of
  18. 18. Mackinac Center for Public Policy | Great Myths of the Great Depression 16Public Opinion in the spring less government. He instead gave policies included a litany ofof 1939 asked, “Do you think Americans more government, political missteps: central bankthe attitude of the Roosevelt but he did so with fanfare and mismanagement, trade-crushingadministration toward business fireside chats that mesmerized tariffs, incentive-sapping taxes,is delaying business recovery?” the a desperate people. By the time mind-numbing controls onAmerican people responded “yes” they began to realize that his production and competition,by a margin of more than 2-to-1. policies were harmful, World senseless destruction of cropsThe business community felt even War II came, the people rallied and cattle and coercive labormore strongly so.44 around their commander-in- laws, to recount just a few. It chief, and there was little desire was not the free market thatIn his private diary, FDR’s very to change the proverbial horse produced 12 years of agony;own Treasury Secretary, Henry in the middle of the stream by rather, it was political bunglingMorgenthau, seemed to agree. He electing someone new. on a grand scale.wrote: “We have tried spendingmoney. We are spending more Along with the holocaust of Those who can survey the eventsthan we have ever spent before World War II came a revival of of the 1920s and 1930s andand it does not work. ... We trade with America’s allies. The blame free-market capitalismhave never made good on our war’s destruction of people and for the economic calamity havepromises. ... I say after eight years resources did not help the U.S. their eyes, ears and minds firmlyof this Administration we have economy, but this renewed trade closed to the facts. Changingjust as much unemployment did. A reinflation of the nation’s the wrong-headed thinking thatas when we started ... and an money supply counteracted the constitutes much of today’senormous debt to boot!”45 high costs of the New Deal, but conventional wisdom about this brought with it a problem that sordid historical episode is vitalAt the end of the decade and plagues us to this day: a dollar to reviving faith in free markets12 years after the stock market that buys less and less in goods and preserving our liberties.crash of Black Thursday, 10 and services year after year.million Americans were jobless. Most importantly, the Truman The nation managed to surviveThe unemployment rate was in administration that followed both Hoover’s activism andexcess of 17 percent. Roosevelt Roosevelt was decidedly less eager Roosevelt’s New Deal quackery,had pledged in 1932 to end to berate and bludgeon private and now the American heritagethe crisis, but it persisted two investors and as a result, those of freedom awaits a rediscoverypresidential terms and countless investors re-entered the economy by a new generation of citizens.interventions later. and fueled a powerful postwar This time we have nothing to fear boom. The Great Depression but myths and misconceptions. finally ended, but it should linger Whither Free in our minds today as one of the - END - Enterprise? most colossal and tragic failuresHow was it that FDR was elected of government and public policyfour times if his policies were in American history. Postscript:deepening and prolonging an Have We Learned Oureconomic catastrophe? Ignorance Th e g e n e s i s o f th e G re at Lessons?and a willingness to give the Depression lay in the irresponsible Eighty years after the Greatpresident the benefit of the doubt monetary and fiscal policies of Depression began, the literatureexplain a lot. Roosevelt beat the U.S. government in the late on this painful episode ofHoover in 1932 with promises of 1920s and early 1930s. These American history is undergoing
  19. 19. Mackinac Center for Public Policy | Great Myths of the Great Depression 17an encouraging metamorphosis. W h i l e A m e r i c a n s m ay b e The taxpayer bailouts of agenciesThe conventional assessment that unlearning some of what they such as Fannie Mae and Freddieso dominated historical writings thought they knew about the Mac, as well as a growing numberfor decades argued that free Great Depression, that’s not of private firms in the early fall ofmarkets caused the debacle and the same as saying we have 2008, represent more folly with athat FDR’s New Deal saved the learned the important lessons monumental price tag. Not onlycountry. Surely, there are plenty well enough to avoid making the will we and future generations beof poorly-informed partisans, same mistakes again. Indeed, paying those bills for decades, theideologues and quacks that still today we are no closer to fixing very process of throwing goodmake these superficial claims. the primary cause of the business money after bad will pile moralSerious historians and economists, cycle — monetary mischief — hazard on top of moral hazard,however, have been busy chipping than we were 80 years ago. fostering more bad decisionsaway at the falsehoods. The essay and future bailouts. This is theyou have just read cites many The financial crisis that gripped stuff that undermines both freerecent works worth careful reading America in 2008 ought to be a enterprise and the soundnessin their entirety. wake-up call. The fingerprints of the currency. Much more of government meddling are inflation to pay these bills isAt the very moment this latest all over it. From 2001 to 2005, more than a little likely, sooneredition of “Great Myths of the the Federal Reserve revved up or later.Great Depression” was about to the money supply, expanding itgo to press, Simon & Schuster at a feverish double-digit rate. “Government,” observed thepublished a splendid new volume The dollar plunged in overseas renowned Austrian economistI strongly recommend. Authored markets and commodity prices Ludwig von Mises, “is the onlyby the Foundation for Economic soared. With the banks flush with institution that can take aEducation’s senior historian and liquidity from the Fed, interest valuable commodity like paper,Hillsdale College professor, Dr. rates plummeted and risky and make it worthless by applyingBurton W. Folsom, the book loans to borrowers of dubious ink.” Mises was describing theis provocatively titled “New merit ballooned. Politicians curse of inflation, the processDeal or Raw Deal? — How threw more fuel on the fire whereby government expandsFDR’s Economic Legacy Has by jawboning banks to lend a nation’s money supply andDamaged America.” It’s one of hundreds of billions of dollars thereby erodes the value of eachthe most illuminating works on for subprime mortgages. monetary unit — dollar, peso,the subject. It will help mightily pound, franc or whatever. Itto correct the record and educate When the bubble burst, some of often shows up in the form ofour fellow citizens about what the very culprits who promoted rising prices, which most peoplereally happened in the 1930s. the policies that caused it confuse with the inflation itself. postured as our rescuers while The distinction is an importantAnother great addition to the endorsing new interventions, one because, as economist Percyliterature, appearing in 2007, bigger government, more inflation Greaves explained so eloquently,is “The Forgotten Man: A New of money and credit and massive “Changing the definition changesHistory of the Great Depression” taxpayer bailouts of failing firms. the responsibility.”by Amity Shlaes. The fact that Many of them are also calling forit has been a New York Times higher taxes and tariffs, the very Define inflation as rising pricesbestseller suggests there is a real nonsense that took a recession in and, like the clueless Jimmyhunger for the truth about this 1930 and made it a long and deep Carter of the 1970s, you’ll thinkperiod of history. depression. that oil sheiks, credit cards
  20. 20. Mackinac Center for Public Policy | Great Myths of the Great Depression 18and private businesses are the fostering booms and busts. If it’s doomed Confederate money ofculprits, and price controls are bad enough, it can even wipe out the Civil War.the answer. Define inflation in the very government responsiblethe classic fashion as an increase for it in the first place and then Today ’s slow-motion dollarin the supply of money and lead to even worse afflictions. depreciation, with consumercredit, with rising prices as a Hitler and Napoleon both rose prices rising at persistent butconsequence, and you then have to power in part because of the mere single-digit rates, is justto ask the revealing question, chaos of runaway inflations. a limited version of the same“Who increases the money process. Government spends,supply?” Only one entity can do All this raises many issues runs deficits and pays some ofthat legally; all others are called economists have long debated: its bills through the inflation tax.“counterfeiters” and go to jail. Who or what should determine How long it can go on is a matter a nation’s supply of money? Why of speculation, but trillions inNobel laureate Milton Friedman do governments so regularly national debt and politicians whoargued indisputably that inflation mismanage it? What is the make misers of drunken sailorsis always and everywhere a connection between fiscal and and get elected by promisingmonetary matter. Rising prices monetary policy? Suffice it to even more are not factors thatno more cause inflation than wet say here that governments inflate should encourage us.streets cause rain. because their appetite for revenue exceeds their willingness to tax Inflation is very much with us butBefore paper money, governments or their ability to borrow. British it must end someday. A currency’sinflated by diminishing the economist John Maynard Keynes value is not bottomless. Itsprecious-metal content of their was an influential charlatan erosion must cease either becausecoinage. The ancient prophet in many ways, but he nailed it government stops its recklessIsaiah reprimanded the Israelites when he wrote, “By a continuing printing or prints until it wreckswith these words: “Thy silver has process of inflation, governments the money. But surely, which waybecome dross, thy wine mixed can confiscate, secretly and it concludes will depend in largewith water.” Roman emperors unobserved, an important part of measure on whether its victimsrepeatedly melted down the the wealth of their citizens.” come to understand what it is andsilver denarius and added junk where it comes from. Meanwhile,metals until the denarius was So, you say, inflation is nasty our economy looks like a rollerless than one percent silver. business but it’s just an isolated coaster because Congresses,The Saracens of Spain clipped phenomenon with the worst Presidents and the agenciesthe edges of their coins so they cases confined to obscure nooks they’ve empowered never ceasecould mint more until the coins and crannies like Zimbabwe. their monetary mischief.became too small to circulate. Not so. The late Frederick Leith-Prices rose as a mirror image of Ross, a famous authority on Are you tired of politiciansthe currency’s worth. international finance, observed: blaming each other, scrambling “Inflation is like sin; ever y to cover their behinds and scoreRising prices are not the only government denounces it and political points in the midst ofconsequence of monetary and every government practices a crisis, and piling debts uponcredit expansion. Inflation also i t .” Ev e n A m e r i c a n s h av e debts they audaciously labelerodes savings and encourages witnessed hyperinflations that “stimulus packages”? Why dodebt. It undermines confidence destroyed two currencies — the so many Americans want toand de ters inve stment . It ill-fated continental dollar of trust them with their health care,destabilizes the economy by the Revolutionary War and the education, retirement and a host
  21. 21. Mackinac Center for Public Policy | Great Myths of the Great Depression 19of other aspects of their lives? It’s of gover nment and how a Everyone has heard the sagemadness writ large. The antidote free economy operates. Help obser vation of philosopheris the truth. We must learn the distribute copies of this essay George Santayana: “Those wholessons of our follies and resolve and other good publications cannot remember the past areto fix them now, not later. that promote liberty and free condemned to repeat it.” It’s enterprise. Demand that your a warning we should not failTo that end, I invite the reader representatives in government to join the education process. balance the budget, conformSupport organizations like to the spirit and letter of theFEE and the Mackinac Center Constitution and stop tryingthat are working to inform to buy your vote with othercitizens about the proper role people’s money. A Final Word In 2004, two UCLA economists—Harold L. Cole and Lee E. Ohanian—coauthored a fascinating article in an important mainstream publication, the Journal of Political Economy. It made this observation: the policies of President Franklin Roosevelt extended the Great Depression by seven long years. “The economy was poised for a beautiful recovery,” the authors show, “but that recovery was stalled by these misguided policies.” In a commentary on Cole and Ohanian’s research available at, Loyola University economist Thomas DiLorenzo points out that six years after FDR took office, unemployment was almost six times the pre-Depression level. Per capita GDP, personal consumption expenditures and net private investment were all lower in 1939 than they were in 1929. “The fact that it has taken ‘mainstream’ neoclassical economists so long to recognize this fact” (that FDR’s policies exacerbated the disaster), notes DiLorenzo, “is truly astounding” but still “better late than never.” Slowly but surely, the truth is getting out.About the Author Lawrence W. Reed is president of the Foundation for Economic Education (FEE), founded in 1946 and headquartered in Irvington, N.Y., and president emeritus of the Mackinac Center for Public Policy in Midland, Mich. Prior to assuming the FEE presidency in September 2008, he led the Mackinac Center for 20 years. Reed is author of more than 1,000 columns and articles that have appeared in publications all around the world, including The Wall Street Journal, Investor’s Business Daily, The Detroit News,USA Today, and the Christian Science Monitor. He has visited 70 countries and delivered speeches in many of them,including his well-known “Seven Principles of Sound Policy” at People’s University in Beijing, China. He is a pastpresident and a 15-year board member of the State Policy Network. He chaired the board of trustees of the Foundationfor Economic Education in the 1990s and has authored nearly 200 articles in FEE’s journal, The Freeman, since 1977.More information about the author and the two organizations sponsoring this publication can be found and