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					Mackinac Center for Public Policy | Great Myths of the Great Depression   




                             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                                                                    These and other
                                                                              myths are dispelled
                                                                              by the facts in this
                              by Lawrence W. Reed                             essay by economist
                                                                              Lawrence W. Reed
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 Mackinac Center for Public Policy | Great Myths of the Great Depression   
Mackinac Center for Public Policy | Great Myths of the Great Depression   




 Great Myths of the Great Depression
                                                                              by Lawrence W. Reed

s
    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, Mackinac Center for Public Policy President
Lawrence Reed debunks the conventional view and traces the central role that poor government policy played
in fostering this legendary catastrophe.


           INTRODucTION                        sive economic contractions could
Many volumes have been written                 occur at any moment, without
about the Great Depression of                  warning, without cause. That fear
1929-1941 and its impact on the                has been exploited ever since as
lives of millions of Americans.                the major justification for virtually
Historians, economists, and politi-            unlimited federal intervention in
cians have all combed the wreckage             economic affairs.”1
searching for the “black box” that
will reveal the cause of the calamity.         Old myths never die; they just          THE GREAT DEPRESSION devastated every part
                                                                                       of America, even its smallest towns .
Sadly, all too many of them decide             keep showing up in economics and
to abandon their search, finding it            political science textbooks. With
easier perhaps to circulate a host             only an occasional exception, it is     But those who propagate this ver-
of false and harmful conclusions               there you will find what may be         sion of history might just as well
about the events of seven decades              the twentieth century’s greatest        top off their remarks by saying,
ago. Consequently, many people                 myth: Capitalism and the free-mar-      “And Goldilocks found her way out
today continue to accept critiques             ket economy were responsible for the    of the forest, Dorothy made it from
of free-market capitalism that are             Great Depression, and only govern-      Oz back to Kansas, and Little Red
unjustified and support govern-                ment intervention brought about         Riding Hood won the New York
ment policies that are economically            America’s economic recovery.            State Lottery.” The popular account
destructive.                                                                           of the Depression as outlined above
                                                                                       belongs in a book of fairy tales and
How bad was the Great Depres-                        A MODERN FAIRy TALE               not in a serious discussion of eco-
sion? Over the four years from                 According to this simplistic per-       nomic history.
1929 to 1933, production at the                spective, an important pillar of cap-
nation’s factories, mines, and utili-          italism, the stock market, crashed
                                                                                               THE GREAT, GREAT,
ties fell by more than half. People’s          and dragged America into depres-
real disposable incomes dropped                sion. President Herbert Hoover, an           GREAT,GREAT DEPRESSION
28 percent. Stock prices collapsed             advocate of “hands-off,” or laissez-    To properly understand the events
to one-tenth of their pre-crash                faire, economic policy, refused to      of the time, it is factually appropri-
height. The number of unemployed               use the power of government and         ate to view the Great Depression
Americans rose from 1.6 million in             conditions worsened as a result.        as not one, but four consecutive
1929 to 12.8 million in 1933. One              It was up to Hoover’s successor,        downturns rolled into one. These
of every four workers was out of a             Franklin Delano Roosevelt, to           four “phases” are:2
job at the Depression’s nadir, and             ride in on the white horse of gov-
ugly rumors of revolt simmered for             ernment intervention and steer          I.    Monetary Policy and the
the first time since the Civil War.            the nation toward recovery. The               Business Cycle
                                               apparent lesson to be drawn is          II. The Disintegration of the
“The terror of the Great Crash has             that capitalism cannot be trusted;          World Economy
been the failure to explain it,” writes        government needs to take an active      III. The New Deal
economist Alan Reynolds. “People               role in the economy to save us from
were left with the feeling that mas-           inevitable decline.                     IV. The Wagner Act
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 The first phase covers why the
                                                                            



                                                    in previous decades. In fact, in              economist Murray Rothbard. Us-
 crash of 1929 happened in the                      the fall of 1928 margin require-              ing a broad measure that includes
 first place; the other three show                  ments began to rise, and bor-                 currency, demand and time de-
 how government intervention                        rowers were required to pay a                 posits, and other ingredients, he
 worsened it and kept the economy                   larger share of the purchase                  estimated that the Fed bloated the
 in a stupor for over a decade. Let’s               price of the stocks.                          money supply by more than 60
 consider each one in turn.                                                                       percent from mid-1921 to mid-
                                                The margin lending argument                       1929.3 Rothbard argued that this
                                                doesn’t hold much water. Mischief                 expansion of money and credit
             PHASE I:
                                                                                                  drove interest rates down, pushed
        THE BuSINESS cycLE                                                                        the stock market to dizzy heights,
 The Great Depression was not the                                                                 and gave birth to the “Roaring
 country’s first depression, though                                                               Twenties.”
 it proved to be the longest. Several
 others preceded it.                                                                              Reckless money and credit growth
                                                                                                  constituted what economist Ben-
 A common thread woven through                                                                    jamin M. Anderson called “the
 all of those earlier debacles was                                                                beginning of the New Deal”4 — the
 disastrous intervention by govern-                                                               name for the better-known but
 ment, often in the form of political           PEOPLE WHO ARGuE that the free-market             highly interventionist policies that
 mismanagement of the money                     economy collapsed of its own weight in the        would come later under President
 and credit supply. None of these               1930s seem utterly unaware of the critical role   Franklin Roosevelt. However,
 depressions, however, lasted more              played by the Federal Reserve System’s gross      other scholars raise doubts that Fed
 than four years and most of them               mismanagement of money and credit.                action was as inflationary as Roth-
 were over in two. The calamity that                                                              bard believed, pointing to relatively
 began in 1929 lasted at least three            with the money and credit supply,                 flat commodity and consumer
 times longer than any of the country’s         however, is another story.                        prices in the 1920s as evidence that
 previous depressions because the                                                                 monetary policy was not so wildly
 government compounded its initial              Most monetary economists, par-                    irresponsible.
 errors with a series of additional and         ticularly those of the “Austrian
 harmful interventions.                         School,” have observed the close                  Substantial cuts in high marginal
                                                relationship between money sup-                   income tax rates in the Coolidge
                                                ply and economic activity. When                   years certainly helped the econ-
     cENTRAL PLANNERS FAIL
                                                government inflates the money                     omy and may have ameliorated
      AT MONETARy POLIcy                        and credit supply, interest rates at              the price effect of Fed policy.
 A popular explanation for the                  first fall. Businesses invest this “easy          Tax reductions spurred invest-
 stock market collapse of 1929                  money” in new production projects                 ment and real economic growth,
 concerns the practice of borrowing             and a boom takes place in capital                 which in turn yielded a burst of
 money to buy stock. Many history               goods. As the boom matures,                       technological advancement and
 texts blithely assert that a frenzied          business costs rise, interest rates               entrepreneurial discoveries of
 speculation in shares was fed by               readjust upward, and profits are                  cheaper ways to produce goods.
 excessive “margin lending.” But                squeezed. The easy-money effects                  This explosion in productiv-
 Marquette University economist                 thus wear off and the monetary                    ity undoubtedly helped to keep
 Gene Smiley, in his 2002 book                  authorities, fearing price inflation,             prices lower than they would
 Rethinking the Great Depression,               slow the growth of, or even con-                  have otherwise been.
 explains why this is not a fruitful            tract, the money supply. In either
 observation:                                   case, the manipulation is enough                  Regarding Fed policy, free market
                                                to knock out the shaky supports                   economists who differ on the ex-
    There was already a long his-               from underneath the economic                      tent of the Fed’s monetary expan-
    tory of margin lending on stock             house of cards.                                   sion of the early and mid-‘20s are
    exchanges, and margin require-                                                                of one view about what happened
    ments — the share of the pur-               One prominent interpretation of                   next: The central bank presided
    chase price paid in cash — were             the Federal Reserve System’s ac-                  over a dramatic contraction of the
    no lower in the late twenties               tions prior to 1929 can be found                  money supply that began late in the
    than in the early twenties or               in America’s Great Depression by                  decade. The federal government’s
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 responses to the resulting recession
                                                                           




 took a bad situation and made it
 far, far worse.


     THE BOTTOM DROPS OuT
 By 1928, the Federal Reserve was
 raising interest rates and choking
 off the money supply. For example,
 its discount rate (the rate the Fed
 charges member banks for loans)
 was increased four times, from
 3.5 percent to 6 percent, between
 January 1928 and August 1929.
 The central bank took further
 deflationary action by aggressively
 selling government securities for
 months after the stock market                  uNEMPLOyMENT SKyROcKETED after congress raised tariffs and taxes in the early 1930s and
 crashed. For the next three years,             stayed high as policies of the Roosevelt administration discouraged investment and recovery
 the money supply shrank by 30                  during the rest of the decade.
 percent. As prices then tumbled
 throughout the economy, the Fed’s              ing stocks and buying bonds and                    again and thereafter seesawed
 higher interest rate policy boosted            gold as early as 1928; Kennedy did                 for a fortnight.
 real (inflation-adjusted) rates dra-           likewise, commenting, “only a fool
 matically.                                     holds out for the top dollar.”6                    The real crunch began on
                                                                                                   Wednesday, October 23, with
 The most comprehensive chronicle               The masses of investors eventually                 what one observer called “a
 of the monetary policies of the                sensed the change at the Fed and                   Niagara of liquidation.” Six mil-
 period can be found in the classic             then the stampede began. In a spe-                 lion shares changed hands. The
 work of Nobel Laureate Milton                  cial issue commemorating the 50th                  industrial average fell 21 points.
 Friedman and his colleague Anna                anniversary of the stock market                    “Tomorrow, the turn will come,”
 Schwartz, A Monetary History of the            collapse, U.S. News & World Report                 brokers told one another. Prices,
 United States, 1867-1960. Friedman             described it this way:                             they said, had been carried to
 and Schwartz argue conclusively                                                                   “unreasonably low” levels.
 that the contraction of the nation’s               Actually the Great Crash was
 money supply by one-third be-                      by no means a one-day affair,                  But the next day, Black Thurs-
 tween August 1929 and March                        despite frequent references to                 day, stocks were dumped in even
 1933 was an enormous drag on the                   Black Thursday, October 24,                    heavier selling ... the ticker fell
 economy and largely the result of                  and the following week’s Black                 behind more than 5 hours, and
 seismic incompetence by the Fed.                   Tuesday. As early as September                 finally stopped grinding out
 The death in October 1928 of                       5, stocks were weak in heavy                   quotations at 7:08 p.m.7
 Benjamin Strong, a powerful figure                 trading, after having moved
 who had exerted great influence as                 into new high ground two days              At their peak, stocks in the Dow
 head of the Fed’s New York district                earlier. Declines in early Octo-           Jones Industrial Average were sell-
 bank, left the Fed floundering with-               ber were called a “desirable cor-          ing for 19 times earnings — some-
 out capable leadership — making                    rection.” The Wall Street Journal,         what high, but hardly what stock
 bad policy even worse.5                            predicting an autumn rally,                market analysts regard as a sign of
                                                    noted that “some stocks rise,              inordinate speculation. The distor-
 At first, only the “smart” money                   some fall.”                                tions in the economy promoted by
 — the Bernard Baruchs and the                                                                 the Fed’s monetary policy had set
 Joseph Kennedys who watched                        Then, on October 3, stocks suf-            the country up for a recession, but
 things like money supply and                       fered their worst pummeling of             other impositions to come would
 other government policies — saw                    the year. Margin calls went out;           soon turn the recession into a
 that the party was coming to an                    some traders grew apprehen-                full-scale disaster. As stocks took a
 end. Baruch actually began sell-                   sive. But the next day, prices rose        beating, Congress was playing with
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 fire: On the very morning of Black
                                                                           



                                                (GM itself stayed in the black         try down the path of socialism.”8
 Thursday, the nation’s newspapers              throughout the Depression under        Contrary to the conventional view
 reported that the political forces for         the cost-cutting leadership of Al-     about Hoover, Roosevelt and Gar-
 higher trade-damaging tariffs were             fred P. Sloan.)                        ner were absolutely right.
 making gains on Capitol Hill.
                                                                                       The crowning folly of the Hoover
                                                   PHASE II: DISINTEGRATION
 The stock market crash was only a                                                     administration was the Smoot-
 reflection — not the direct cause                 OF THE WORLD EcONOMy                Hawley Tariff, passed in June 1930.
 — of the destructive government                Though modern myth claims that         It came on top of the Fordney-Mc-
 policies that would ultimately pro-            the free market “self-destructed” in   Cumber Tariff of 1922, which had
 duce the Great Depression: The                 1929, government policy was the        already put American agriculture
 market rose and fell in almost direct          debacle’s principal culprit. If this   in a tailspin during the preceding
 synchronization with what the Fed              crash had been like previous ones,     decade. The most protectionist
 and Congress were doing. And what              the hard times would have ended        legislation in U.S. history, Smoot-
 they did in the 1930s ranks way                in two or three years at the most,     Hawley virtually closed the bor-
 up there in the annals of history’s            and likely sooner than that. But       ders to foreign goods and ignited
 greatest follies.                              unprecedented political bungling       a vicious international trade war.
                                                instead prolonged the misery for       Professor Barry Poulson describes
                                                over 10 years.                         the scope of the act:
         BuDDy, cAN yOu
        SPARE $20 MILLION?                      Unemployment in 1930 averaged             The act raised the rates on
 Black Thursday shook Michigan                  a mildly recessionary 8.9 percent,        the entire range of dutiable
 harder than almost any other                   up from 3.2 percent in 1929. It           commodities; for example, the
 state. Stocks of auto and mining               shot up rapidly until peaking out         average rate increased from
 companies were hammered. Auto                  at more than 25 percent in 1933.          20 percent to 34 percent on
 production in 1929 reached an                  Until March of 1933, these were           agricultural products; from
 all-time high of slightly more than            the years of President Herbert            36 percent to 47 percent on
 five million vehicles, then quickly            Hoover — a man often depicted as          wines, spirits, and beverages;
 slumped by two million in 1930. By             a champion of noninterventionist,         from 50 to 60 percent on wool
 1932, near the deepest point of the            laissez-faire economics.                  and woolen manufactures. In
 Depression, they had fallen by an-                                                       all, 887 tariffs were sharply in-
 other two million to just 1,331,860                                                      creased and the act broadened
                                                    “THE GREATEST SPENDING
 — down an astonishing 75 percent                                                         the list of dutiable commodities
 from the 1929 peak.
                                                       ADMINISTRATION IN                  to 3,218 items. A crucial part
                                                        ALL OF HISTORy”                   of the Smoot-Hawley Tariff
 Thousands of investors every-                  Did Hoover really subscribe to a          was that many tariffs were for a
 where, including many well-known               “hands-off-the-economy,” free-            specific amount of money rather
 people, were hit hard in the 1929              market philosophy? His opponent           than a percentage of the price.
 crash. Among them was Winston                  in the 1932 election, Franklin            As prices fell by half or more
 Churchill. He had invested heav-               Roosevelt, didn’t think so. During        during the Great Depression,
 ily in American stocks before the              the campaign, Roosevelt blasted           the effective rate of these spe-
 crash. Afterward, only his writing             Hoover for spending and taxing            cific tariffs doubled, increasing
 skills and positions in government             too much, boosting the national           the protection afforded under
 restored his finances.                         debt, choking off trade, and putting      the act.9
                                                millions on the dole. He accused
 Clarence Birdseye, an early devel-             the president of “reckless and ex-     Smoot-Hawley was as broad as it
 oper of packaged frozen foods, had             travagant” spending, of thinking       was deep, affecting a multitude of
 sold his business for $30 million              “that we ought to center control       products. Before its passage, clocks
 and put all his money into stocks.             of everything in Washington as         had faced a tariff of 45 percent;
 He was wiped out.                              rapidly as possible,” and of presid-   the act raised that to 55 percent,
                                                ing over “the greatest spending        plus as much as another $4.50 per
 William C. Durant, founder of                  administration in peacetime in         clock. Tariffs on corn and butter
 General Motors, lost more than                 all of history.” Roosevelt’s running   were roughly doubled. Even sauer-
 $40 million in the stock market                mate, John Nance Garner, charged       kraut was tariffed for the first time.
 and wound up a virtual pauper.                 that Hoover was “leading the coun-     Among the few remaining tariff-
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 free goods, strangely enough, were
                                                                            




 leeches and skeletons (perhaps as
 a political sop to the American
 Medical Association, as one wag
 wryly remarked).

 Tariffs on linseed oil, tungsten, and
 casein hammered the U.S. paint,
 steel, and paper industries, respec-
 tively. More than 800 items used
 in automobile production were
 taxed by Smoot-Hawley. Most of
 the 60,000 people employed in U.S.
 plants making cheap clothing out
 of imported wool rags went home
 jobless after the tariff on wool rags          PRESIDENT HERBERT HOOVER is mistakenly presented in standard history texts as a laissez-faire
 rose by 140 percent.10                         president, but he signed into law so many costly and foolish bills that one of Franklin Roosevelt’s
                                                top aides later said that “practically the whole New Deal was extrapolated from programs that
                                                Hoover started.”
 Officials in the administration and
 in Congress believed that raising              With the collapse of agriculture,                   it nearly impossible for foreign
 trade barriers would force Ameri-              rural banks failed in record num-                   businessmen to sell their goods
 cans to buy more goods made                    bers, dragging down hundreds of                     in American markets, the burden
 at home, which would solve the                 thousands of their customers. Nine                  of their debts became massively
 nagging unemployment problem.                  thousand banks closed their doors                   heavier and emboldened dema-
 But they ignored an important                  in the United States between 1930                   gogues like Adolf Hitler. “When
 principle of international com-                and 1933. The stock market, which                   goods don’t cross frontiers, armies
 merce: Trade is ultimately a two-              had regained much of the ground                     will,” warns an old but painfully
 way street; if foreigners cannot               it had lost since the previous Oc-                  true maxim.
 sell their goods here, then they               tober, tumbled 20 points on the
 cannot earn the dollars they need              day Hoover signed Smoot-Hawley
                                                                                                             FREE MARKETS OR
 to buy here. Or, to put it another             into law, and fell almost without
 way, government cannot shut off                respite for the next two years. (The                          FREE LuNcHES?
 imports without simultaneously                 market’s high, as measured by the                   Smoot-Hawley by itself should
 shutting off exports.                          Dow Jones Industrial Average, was                   lay to rest the myth that Hoover
                                                set on September 3, 1929, at 381.                   was a free market practitioner, but
                                                It hit its 1929 low of 198 on No-                   there is even more to the story of
     yOu TAx ME, I TAx yOu                      vember 13, then rebounded to 294                    his administration’s interventionist
 Foreign companies and their work-              by April 1930. It declined again as                 mistakes. Within a month of the
 ers were flattened by Smoot-Haw-               the tariff bill made its way toward                 stock market crash, he convened
 ley’s steep tariff rates and foreign           Hoover’s desk in June and did not                   conferences of business leaders for
 governments soon retaliated with               bottom out until it reached a mere                  the purpose of jawboning them into
 trade barriers of their own. With              41 two years later. It would be a                   keeping wages artificially high even
 their ability to sell in the Ameri-            quarter-century before the Dow                      though both profits and prices were
 can market severely hampered,                  would climb to 381 again.)                          falling. Consumer prices plunged
 they curtailed their purchases of                                                                  almost 25 percent between 1929
 American goods. American agri-                 The shrinkage in world trade                        and 1933 while nominal wages on
 culture was particularly hard hit.             brought on by the tariff wars                       average decreased only 15 percent
 With a stroke of the presidential              helped set the stage for World                      — translating into a substantial
 pen, farmers in this country lost              War II a few years later. In 1929,                  increase in wages in real terms,
 nearly a third of their markets.               the rest of the world owed Ameri-                   a major component of the cost
 Farm prices plummeted and tens                 can citizens $30 billion. Germany’s                 of doing business. As economist
 of thousands of farmers went                   Weimar Republic was struggling to                   Richard Ebeling notes, “The ‘high-
 bankrupt. A bushel of wheat that               pay the enormous reparations bill                   wage’ policy of the Hoover admin-
 sold for $1.00 in 1929 was selling             imposed by the disastrous Treaty                    istration and the trade unions ...
 for a mere 30 cents by 1932.                   of Versailles. When tariffs made                    succeeded only in pricing workers
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 out of the labor market, generating
                                                                           



                                                then passed and Hoover signed                   edged sword of declining rev-
 an increasing circle of unemploy-              the Revenue Act of 1932. The                    enues and increasing welfare
 ment.”11                                       largest tax increase in peacetime               demands, the burden on the
                                                history, it doubled the income tax.             cities pushed many municipali-
 Hoover dramatically increased                  The top bracket actually more                   ties to the brink. Schools in New
 government spending for subsidy                than doubled, soaring from 24                   York shut down, and teachers
 and relief schemes. In the space of            percent to 63 percent. Exemptions               in Chicago were owed some
 one year alone, from 1930 to 1931,             were lowered; the earned income                 $20 million. Private schools, in
 the federal government’s share of              credit was abolished; corporate                 many cases, failed completely.
 GNP soared from 16.4 percent to                and estate taxes were raised; new               One government study found
 21.5 percent.12 Hoover’s agricultur-           gift, gasoline, and auto taxes were             that by 1933 some fifteen hun-
 al bureaucracy doled out hundreds              imposed; and postal rates were                  dred colleges had gone belly-up,
 of millions of dollars to wheat and            sharply hiked.                                  and book sales plummeted.
 cotton farmers even as the new                                                                 Chicago’s library system did
 tariffs wiped out their markets.                                                               not purchase a single book in a
 His Reconstruction Finance Cor-                                                                year-long period.15
 poration ladled out billions more
 in business subsidies. Commenting
 decades later on Hoover’s admin-                                                                PHASE III: THE NEW DEAL
 istration, Rexford Guy Tugwell,                                                              Franklin Delano Roosevelt won
 one of the architects of Franklin                                                            the 1932 presidential election in a
 Roosevelt’s policies of the 1930s,                                                           landslide, collecting 472 electoral
 explained, “We didn’t admit it at                                                            votes to just 59 for the incumbent
 the time, but practically the whole                                                          Herbert Hoover. The platform
 New Deal was extrapolated from                                                               of the Democratic Party, whose
 programs that Hoover started.”13                                                             ticket Roosevelt headed, declared,
                                                                                              “We believe that a party platform
 Though Hoover at first did lower                                                             is a covenant with the people to
 taxes for the poorest of Americans,                                                          be faithfully kept by the party
 Larry Schweikart and Michael                   AMERIcANS VOTED for Franklin Roosevelt        entrusted with power.” It called
 Allen in their sweeping A Patriot’s            in 1932 expecting him to adhere to the        for a 25-percent reduction in fed-
                                                Democratic Party platform, which called for
 History of the United States: From                                                           eral spending, a balanced federal
                                                less government spending and regulation.
 Columbus’s Great Discovery to the                                                            budget, a sound gold currency “to
 War on Terror stress that he “of-                                                            be preserved at all hazards,” the
 fered no incentives to the wealthy             Can any serious scholar observe               removal of government from areas
 to invest in new plants to stimulate           the Hoover administration’s mas-              that belonged more appropriately
 hiring.” He even taxed bank checks,            sive economic intervention and,               to private enterprise, and an end to
 “which accelerated the decline in              with a straight face, pronounce               the “extravagance” of Hoover’s farm
 the availability of money by penal-            the inevitably deleterious effects            programs. This is what candidate
 izing people for writing checks.”14            as the fault of free markets? Sch-            Roosevelt promised, but it bears
                                                weikart and Allen survey some of              no resemblance to what President
 In September 1931, with the                    the wreckage:                                 Roosevelt actually delivered.
 money supply tumbling and the
 economy reeling from the impact                    By 1933, the numbers produced             Washington was rife with both
 of Smoot-Hawley, the Fed imposed                   by this comedy of errors were             fear and optimism as Roosevelt
 the biggest hike in its discount rate              staggering: national unemploy-            was sworn in on March 4, 1933
 in history. Bank deposits fell 15                  ment rates reached 25 percent,            — fear that the economy might not
 percent within four months and                     but within some individual                recover and optimism that the new
 sizable, deflationary declines in the              cities, the statistics seemed be-         and assertive president just might
 nation’s money supply persisted                    yond comprehension. Cleveland             make a difference. Humorist Will
 through the first half of 1932.                    reported that 50 percent of its           Rogers captured the popular feel-
                                                    labor force was unemployed;               ing toward FDR as he assembled
 Compounding the error of high                      Toledo, 80 percent; and some              the new administration: “The
 tariffs, huge subsidies, and defla-                states even averaged over 40              whole country is with him, just
 tionary monetary policy, Congress                  percent. Because of the dual-             so he does something. If he burned
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 Mackinac Center for Public Policy | Great Myths of the Great Depression


 down the Capitol, we would all
                                                                           



                                                    Will we choose to subject our-
 cheer and say, well, we at least got               selves — this great country
 a fire started anyhow.”16                          — to the despotism of bureau-
                                                    cracy, controlling our every
                                                    act, destroying what equality
         “NOTHING TO FEAR
                                                    we have attained, reducing us
          BuT FEAR ITSELF”                          eventually to the condition of
 Roosevelt did indeed make a dif-                   impoverished slaves of the state?
 ference, though probably not the                   Or will we cling to the liberties
 sort of difference for which the                   for which man has struggled for
 country had hoped. He started                      more than a thousand years? It
 off on the wrong foot when, in                     is important to understand the
 his inaugural address, he blamed                   magnitude of the issue before
 the Depression on “unscrupulous                    us. ... If we do not elect to have
 money changers.” He said noth-                     a tyrannical, oppressive bu-
 ing about the role of the Fed’s                    reaucracy controlling our lives,
 mismanagement and little about                     destroying progress, depressing
 the follies of Congress that had                   the standard of living ... then
 contributed to the problem. As a                   should it not be the function of     PRESIDENT FRANKLIN ROOSEVELT decried as
 result of his efforts, the economy                 the Federal government under         selfish “economic royalists” those businessmen
 would linger in depression for                     a democracy to limit its activi-     who opposed the burdensome taxes and
 the rest of the decade. Adapting                   ties to those which a democracy      regulations of his “New Deal.”
 a phrase from nineteenth-cen-                      may adequately deal, such for
 tury writer Henry David Thoreau,                   example as national defense,         the holiday was declared did not
 Roosevelt famously declared in his                 maintaining law and order,           reopen their doors when it ended,
 address that, “We have nothing to                  protecting life and property,        and of these, over 2,000 never did
 fear but fear itself.” But as Dr. Hans             preventing dishonesty, and ...       thereafter,” report Friedman and
 Sennholz of Grove City College                     guarding the public against ...      Schwartz.19
 explains, it was FDR’s policies to                 vested special interests?18
 come that Americans had genuine                                                         Economist Jim Powell of the Cato
 reason to fear:                                                                         Institute authored a splendid book
                                                     NEW DEALING FROM THE
                                                                                         on the Great Depression in 2003,
    In his first 100 days, he swung                   BOTTOM OF THE DEcK                 titled FDR’s Folly: How Roosevelt
    hard at the profit order. Instead           Crisis gripped the banking sys-          and His New Deal Prolonged the
    of clearing away the prosperity             tem when the new president as-           Great Depression. He points out
    barriers erected by his predeces-           sumed office on March 4, 1933.           that “Almost all the failed banks
    sor, he built new ones of his own.          Roosevelt’s action to close the          were in states with unit bank-
    He struck in every known way                banks and declare a nationwide           ing laws” — laws that prohibited
    at the integrity of the U.S. dollar         “banking holiday” on March 6             banks from opening branches and
    through quantitative increases              (which did not completely end            thereby diversifying their portfo-
    and qualitative deterioration.              until nine days later) is still hailed   lios and reducing their risks. Pow-
    He seized the people’s gold hold-           as a decisive and necessary action       ell writes: “Although the United
    ings and subsequently devalued              by Roosevelt apologists. Friedman        States, with its unit banking laws,
    the dollar by 40 percent.17                 and Schwartz, however, make              had thousands of bank failures,
                                                it plain that this supposed cure         Canada, which permitted branch
 Frustrated and angered that Roos-              was “worse than the disease.” The        banking , didn’t have a single
 evelt had so quickly and thoroughly            Smoot-Hawley tariff and the Fed’s        failure ...” 20 Strangely, critics of
 abandoned the platform on which                unconscionable monetary mischief         capitalism who love to blame the
 he was elected, Director of the                were primary culprits in producing       market for the Depression never
 Bureau of the Budget Lewis W.                  the conditions that gave Roosevelt       mention that fact.
 Douglas resigned after only one                his excuse to temporarily deprive
 year on the job. At Harvard Uni-               depositors of their money, and the       Congress gave the president the
 versity in May 1935, Douglas made              bank holiday did nothing to alter        power first to seize the private gold
 it plain that America was facing a             those fundamentals. “More than           holdings of American citizens and
 momentous choice:                              5,000 banks still in operation when      then to fix the price of gold. One
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 morning, as Roosevelt ate eggs in
                                                                           0



                                                states had ratified it so that the              1933 threw an estimated 500,000
 bed, he and Secretary of the Trea-             21st Amendment became part of                   blacks out of work).24 And current
 sury Henry Morgenthau decided                  the Constitution. One observer,                 studies and estimates reveal that
 to change the ratio between gold               commenting on this remarkable                   Social Security has become such a
 and paper dollars. After weigh-                turn of events, noted that of two               long-term actuarial nightmare that
 ing his options, Roosevelt settled             men walking down the street at                  it will either have to be privatized
 on a 21-cent price hike because                the start of 1933 — one with a gold             or the already high taxes needed to
 “it’s a lucky number.” In his diary,           coin in his pocket and the other                keep it afloat will have to be raised
 Morgenthau wrote, “If anybody                  with a bottle of whiskey in his coat            to the stratosphere.
 ever knew how we really set the                — the man with the coin would
 gold price through a combination               be an upstanding citizen and the                Roosevelt secured passage of the
 of lucky numbers, I think they                 man with the whiskey would be                   Agricultural Adjustment Act,
 would be frightened.”21 Roosevelt              the outlaw. A year later, precisely             which levied a new tax on agri-
 also single-handedly torpedoed the             the reverse was true.                           cultural processors and used the
 London Economic Conference in                                                                  revenue to supervise the wholesale
 1933, which was convened at the                                                                destruction of valuable crops and
 request of other major nations to                                                              cattle. Federal agents oversaw the
 bring down tariff rates and restore                                                            ugly spectacle of perfectly good
 the gold standard.                                                                             fields of cotton, wheat, and corn be-
                                                                                                ing plowed under (the mules had to
 Washington and its reckless central                                                            be convinced to trample the crops;
 bank had already made mincemeat                                                                they had been trained, of course,
 of the gold standard by the early                                                              to walk between the rows). Healthy
 1930s. Roosevelt’s rejection of it                                                             cattle, sheep, and pigs were slaugh-
 removed most of the remaining                                                                  tered and buried in mass graves.
 impediments to limitless cur-                                                                  Secretary of Agriculture Henry
 rency and credit expansion, for                                                                Wallace personally gave the order
 which the nation would pay a high              TO MANy AMERIcANS, the National Recovery        to slaughter six million baby pigs
 price in later years in the form of            Administration’s bureaucracy and mind-numbing   before they grew to full size. The
 a depreciating currency. Senator               regulations became known as the “National       administration also paid farmers
 Carter Glass put it well when he               Run Around.”                                    for the first time for not working
 warned Roosevelt in early 1933:                                                                at all. Even if the AAA had helped
 “It’s dishonor, sir. This great gov-           In the first year of the New Deal,              farmers by curtailing supplies and
 ernment, strong in gold, is breaking           Roosevelt proposed spending $10                 raising prices, it could have done
 its promises to pay gold to widows             billion while revenues were only                so only by hurting millions of oth-
 and orphans to whom it has sold                $3 billion. Between 1933 and 1936,              ers who had to pay those prices or
 government bonds with a pledge                 government expenditures rose by                 make do with less to eat.
 to pay gold coin of the present                more than 83 percent. Federal debt
 standard of value. It is breaking its          skyrocketed by 73 percent.
 promise to redeem its paper money                                                                 BLuE EAGLES, RED DucKS
 in gold coin of the present standard           FDR talked Congress into creat-                 Perhaps the most radical aspect
 of value. It’s dishonor, sir.”22               ing Social Security in 1935 and                 of the New Deal was the National
                                                imposing the nation’s first com-                Industrial Recovery Act, passed
 Though he seized the country’s                 prehensive minimum wage law in                  in June 1933, which created a
 gold, Roosevelt did return booze               1938. While to this day he gets a               massive new bureaucracy called
 to America’s bars and parlor rooms.            great deal of credit for these two              the National Recovery Admin-
 On his second Sunday in the White              measures from the general public,               istration. Under the NRA, most
 House, he remarked at dinner, “I               many economists have a different                manufacturing industries were
 think this would be a good time for            perspective. The minimum wage                   suddenly forced into government-
 beer.”23 That same night, he drafted           law prices many of the inexperi-                mandated cartels. Codes that
 a message asking Congress to end               enced, the young, the unskilled,                regulated prices and terms of sale
 Prohibition. The House approved                and the disadvantaged out of                    briefly transformed much of the
 a repeal measure on Tuesday, the               the labor market. (For example,                 American economy into a fascist-
 Senate passed it on Thursday and               the minimum wage provisions                     style arrangement, while the NRA
 before the year was out, enough                passed as part of another act in                was financed by new taxes on the
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 very industries it controlled. Some
                                                                           




 economists have estimated that
 the NRA boosted the cost of doing
 business by an average of 40 per-
 cent — not something a depressed
 economy needed for recovery.

 The economic impact of the NRA
 was immediate and powerful. In
 the five months leading up to the
 act’s passage, signs of recovery
 were evident: factory employment
 and payrolls had increased by 23
 and 35 percent, respectively. Then
 came the NRA, shortening hours                 THIS 1989 PHOTO is of a bridge built from 1936-41 as part of a Works Progress Administration
 of work, raising wages arbitrarily,            (WPA) project in coleman county, Texas. Many Americans saw such projects as helpful, without
 and imposing other new costs on                considering their high cost and the corruption that plagued the program.
 enterprise. In the six months af-
 ter the law took effect, industrial            to jail for the “crime” of pressing a
 production dropped 25 percent.                 suit of clothes for 35 cents rather               THE ALPHABET cOMMISSARS
 Benjamin M. Anderson writes,                   than the NRA-inspired “Tailor’s                 Roosevelt next signed into law
 “NRA was not a revival measure.                Code” of 40 cents.                              steep income tax increases on the
 It was an antirevival measure. ...                                                             higher brackets and introduced a
 Through the whole of the NRA pe-               In The Roosevelt Myth, historian                five-percent withholding tax on
 riod industrial production did not             John T. Flynn described how the                 corporate dividends. He secured
 rise as high as it had been in July            NRA’s partisans sometimes con-                  another tax increase in 1934. In
 1933, before NRA came in.”25                   ducted “business”:                              fact, tax hikes became a favorite
                                                                                                policy of Roosevelt for the next ten
 The man Roosevelt picked to direct                 The NRA was discovering it                  years, culminating in a top income
 the NRA effort was General Hugh                    could not enforce its rules. Black          tax rate of 90 percent. Senator Ar-
 “Iron Pants” Johnson, a profane,                   markets grew up. Only the most              thur Vandenberg of Michigan, who
 red-faced bully and professed ad-                  violent police methods could                opposed much of the New Deal,
 mirer of Italian dictator Benito                   procure enforcement. In Sidney              lambasted Roosevelt’s massive
 Mussolini. Thundered Johnson,                      Hillman’s garment industry the              tax increases. A sound economy
 “May Almighty God have mercy on                    code authority employed en-                 would not be restored, he said,
 anyone who attempts to interfere                   forcement police. They roamed               by following the socialist notion
 with the Blue Eagle” (the official                 through the garment district                that America could “lift the lower
 symbol of the NRA, which one                       like storm troopers. They could             one-third up” by pulling “the upper
 senator derisively referred to as the              enter a man’s factory, send                 two-thirds down.”28 Vandenberg
 “Soviet duck”). Those who refused                  him out, line up his employees,             also condemned “the congressional
 to comply with the NRA Johnson                     subject them to minute inter-               surrender to alphabet commissars
 personally threatened with public                  rogation, take over his books               who deeply believe the American
 boycotts and “a punch in the nose.”                on the instant. Night work was              people need to be regimented by
                                                    forbidden. Flying squadrons                 powerful overlords in order to be
 There were ultimately more than                    of these private coat-and-suit              saved.”29
 500 NRA codes, “ranging from                       police went through the district
 the production of lightning rods                   at night, battering down doors              Alphabet commissars spent the
 to the manufacture of corsets and                  with axes looking for men who               public’s money like it was so much
 brassieres, covering more than 2                   were committing the crime of                bilge. They were what influential
 million employers and 22 million                   sewing together a pair of pants             journalist and social critic Albert
 workers.”26 There were codes for                   at night. But without these                 Jay Nock had in mind when he de-
 the production of hair tonic, dog                  harsh methods many code au-                 scribed the New Deal as “a nation-
 leashes, and even musical com-                     thorities said there could be no            wide, State-managed mobilization
 edies. A New Jersey tailor named                   compliance because the public               of inane buffoonery and aimless
 Jack Magid was arrested and sent                   was not back of it.27                       commotion.”30
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 Roosevelt’s Civil Works Admin-
                                                                           



                                                lect campaign contributions for              A brief analogy will illustrate
 istration hired actors to give free            Democratic Party candidates. In              this point. If a thief goes house to
 shows and librarians to catalog                Tennessee, WPA workers were                  house robbing everybody in the
 archives. It even paid researchers to          fired if they refused to donate two          neighborhood, then heads off to
 study the history of the safety pin,           percent of their wages to the in-            a nearby shopping mall to spend
 hired 100 Washington workers to                                                             his ill-gotten loot, it is not as-
 patrol the streets with balloons to                                                         sumed that because his spending
 frighten starlings away from public                                                         “stimulated” the stores at the mall
 buildings, and put men on the public                                                        he has thereby performed a na-
 payroll to chase tumbleweeds on                                                             tional service or provided a general
 windy days.                                                                                 economic benefit. Likewise, when
                                                                                             the government hires someone to
 The CWA, when it was started                                                                catalog the many ways of cook-
 in the fall of 1933, was supposed                                                           ing spinach, his tax-supported
 to be a short-lived jobs program.                                                           paycheck cannot be counted as a
 Roosevelt assured Congress in his                                                           net increase to the economy be-
 State of the Union message that                                                             cause the wealth used to pay him
 any new such program would                                                                  was simply diverted, not created.
 be abolished within a year. “The                                                            Economists today must still battle
 federal government,” said the                                                               this “magical thinking” every time
 president, “must and shall quit this           MIcHIGAN SENATOR Arthur Vandenberg argued    more government spending is
 business of relief. I am not will-             that a sound economy could not be restored   proposed — as if money comes
 ing that the vitality of our people            through FDR’s punitive tax and regulatory    not from productive citizens, but
 be further stopped by the giving               measures.                                    rather from the tooth fairy.
 of cash, of market baskets, of a
 few bits of weekly work cutting                cumbent governor. By 1941, only
                                                                                             “AN ASTONISHING RABBLE OF
 grass, raking leaves, or picking up            59 percent of the WPA budget
 papers in the public parks.” Harry             went to paying workers anything                 IMPuDENT NOBODIES”
 Hopkins was put in charge of the               at all; the rest was sucked up in            Roosevelt’s haphazard economic
 agency and later said, “I’ve got four          administration and overhead. The             interventions garnered credit from
 million at work but for God’s sake,            editors of The New Republic asked,           people who put high value on the
 don’t ask me what they are doing.”             “Has [Roosevelt] the moral stature           appearance of being in charge and
 The CWA came to an end within a                to admit now that the WPA was a              “doing something.” Meanwhile, the
 few months but was replaced with               hasty and grandiose political ges-           great majority of Americans were
 another temporary relief program               ture, that it is a wretched failure          patient. They wanted very much to
 that evolved into the Works Prog-              and should be abolished?”32 The              give this charismatic polio victim
 ress Administration, or WPA, by                last of the WPA’s projects was not           and former New York governor the
 1935. It is known today as the                 eliminated until July of 1943.               benefit of the doubt. But Roosevelt
 very government program that                                                                always had his critics, and they
 gave rise to the new term, “boon-              Roosevelt has been lauded for                would grow more numerous as the
 doggle,” because it “produced” a lot           his “job-creating” acts such as              years groaned on. One of them was
 more than the 77,000 bridges and               the CWA and the WPA. Many                    the inimitable “Sage of Baltimore,”
 116,000 buildings to which its ad-             people think that they helped re-            H. L. Mencken, who rhetorically
 vocates loved to point as evidence             lieve the Depression. What they              threw everything but the kitchen
 of its efficacy.31                             fail to realize is that it was the rest      sink at the president. Paul Johnson
                                                of Roosevelt’s tinkering that pro-           sums up Mencken’s stinging but
 With good reason, critics often                longed the Depression and which              often-humorous barbs this way:
 referred to the WPA as “We Pid-                largely prevented the jobless from
 dle Around.” In Kentucky, WPA                  finding real jobs in the first place.          Mencken excelled himself in
 workers catalogued 350 different               The stupefying roster of wasteful              attacking the triumphant FDR,
 ways to cook spinach. The agency               spending generated by these jobs               whose whiff of fraudulent col-
 employed 6,000 “actors” though                 programs represented a diversion               lectivism filled him with genu-
 the nation’s actors’ union claimed             of valuable resources to politically           ine disgust. He was the ‘Fuhrer,’
 only 4,500 members. Hundreds of                motivated and economically coun-               the ‘Quack,’ surrounded by ‘an
 WPA workers were used to col-                  terproductive purposes.                        astonishing rabble of impudent
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    nobodies,’ ‘a gang of half-edu-
                                                                           




    cated pedagogues, nonconsti-
    tutional lawyers, starry-eyed
    uplifters and other such sorry
    wizards.’ His New Deal was a
    ‘political racket,’ a ‘series of stu-
    pendous bogus miracles,’ with
    its ‘constant appeals to class
    envy and hatred,’ treating gov-
    ernment as ‘a milch-cow with
    125 million teats’ and marked
    by ‘frequent repudiations of
    categorical pledges.’33


             SIGNS OF LIFE                      AT THE NADIR of the Great Depression, half of American industrial production was idle as the
 The American economy was soon                  economy reeled under the weight of endless and destructive policies from both Republicans and
                                                Democrats in Washington.
 relieved of the burden of some
 of the New Deal’s worst excesses                   disputes out of the courts of               and widespread violence pushed
 when the Supreme Court outlawed                    law and brought them under a                productivity down sharply and
 the NRA in 1935 and the AAA in                     newly created Federal agency,               unemployment up dramatically.
 1936, earning Roosevelt’s eternal                  the National Labor Relations                Membership in the nation’s labor
 wrath and derision. Recognizing                    Board, which became prosecu-                unions soared: By 1941, there
 much of what Roosevelt did as un-                  tor, judge, and jury, all in one.           were two and a half times as many
 constitutional, the “nine old men”                 Labor union sympathizers on                 Americans in unions as had been
 of the Court also threw out other,                 the Board further perverted this            the case in 1935. Historian William
 more minor acts and programs                       law, which already afforded legal           E. Leuchtenburg, himself no friend
 which hindered recovery.                           immunities and privileges to                of free enterprise, observed, “Prop-
                                                    labor unions. The U.S. thereby              erty-minded citizens were scared
 Freed from the worst of the New                    abandoned a great achievement               by the seizure of factories, incensed
 Deal, the economy showed some                      of Western civilization, equality           when strikers interfered with the
 signs of life. Unemployment                        under the law.                              mails, vexed by the intimidation
 dropped to 18 percent in 1935, 14                                                              of nonunionists, and alarmed by
 percent in 1936, and even lower in                 The Wagner Act, or National                 flying squadrons of workers who
 1937. But by 1938, it was back up to               Labor Relations Act, was passed             marched, or threatened to march,
 nearly 20 percent as the economy                   in reaction to the Supreme                  from city to city.”35
 slumped again. The stock market                    Court’s voidance of NRA and its
 crashed nearly 50 percent between                  labor codes. It aimed at crushing
                                                                                                     AN uNFRIENDLy cLIMATE
 August 1937 and March 1938. The                    all employer resistance to labor
 “economic stimulus” of Franklin                    unions. Anything an employer                         FOR BuSINESS
 Delano Roosevelt’s New Deal had                    might do in self-defense became             From the White House on the
 achieved a real “first”: a depression              an “unfair labor practice” pun-             heels of the Wagner Act came
 within a depression!                               ishable by the Board. The law               a thunderous barrage of insults
                                                    not only obliged employers to               against business. Businessmen,
                                                    deal and bargain with the unions            Roosevelt fumed, were obstacles
  PHASE IV: THE WAGNER AcT                          designated as the employees’                on the road to recovery. He blasted
 The stage was set for the 1937-38                  representative; later Board                 them as “economic royalists” and
 collapse with the passage of the Na-               decisions also made it unlawful             said that businessmen as a class
 tional Labor Relations Act in 1935                 to resist the demands of labor              were “stupid.”36 He followed up the
 — better known as the “Wagner                      union leaders.34                            insults with a rash of new punitive
 Act” and organized labor’s “Magna                                                              measures. New strictures on the
 Carta.” To quote Sennholz again:               Armed with these sweeping new                   stock market were imposed. A tax
                                                powers, labor unions went on a                  on corporate retained earnings,
    This law revolutionized Ameri-              militant organizing frenzy. Threats,            called the “undistributed profits
    can labor relations. It took labor          boycotts, strikes, seizures of plants,          tax,” was levied. “These soak-the-
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 Mackinac Center for Public Policy | Great Myths of the Great Depression


 rich efforts,” writes economist Rob-
                                                                           



                                                tive order to tax all income over                the members of the Court from 9
 ert Higgs, “left little doubt that the         $25,000 at the astonishing rate of               to 15. His plan failed in Congress,
 president and his administration               100 percent. He also promoted the                but the Court later began rubber-
 intended to push through Congress              lowering of the personal exemption               stamping his policies after a number
 everything they could to extract               to only $600, a tactic that pushed               of opposing justices retired. Until
 wealth from the high-income                    most American families into pay-                 Congress killed the packing scheme,
 earners responsible for making the             ing at least some income tax for the             however, business fears that a Court
 bulk of the nation’s decisions about           first time. Shortly thereafter, Con-             sympathetic to Roosevelt’s goals
 private investment.”37                         gress rescinded the executive order,             would endorse more of the old New
                                                                                                 Deal prevented investment and
 During a period of barely two                                                                   confidence from reviving.
 months during late 1937, the
 market for steel — a key economic                                                               Economic historian Robert Higgs
 barometer — plummeted from 83                                                                   draws a close connection between
 percent of capacity to 35 percent.                                                              the level of private investment
 When that news emblazoned                                                                       and the course of the American
 headlines, Roosevelt took an ill-                                                               economy in the 1930s. The relent-
 timed nine-day fishing trip. The                                                                less assaults of the Roosevelt ad-
 New York Herald-Tribune implored                                                                ministration — in both word and
 him to get back to work to stem                                                                 deed — against business, property,
 the tide of the renewed Depres-                THE SuPREME cOuRT came under attack              and free enterprise guaranteed that
                                                by President Roosevelt because it
 sion. What was needed, said the                                                                 the capital needed to jump-start
                                                declared important parts of the “New Deal”
 newspaper’s editors, was a reversal            unconstitutional. FDR’s “court-packing” scheme
                                                                                                 the economy was either taxed
 of the Roosevelt policy “of bit-               contributed to the resumption of economic        away or forced into hiding. When
 terness and hate, of setting class             depression in 1937.                              FDR took America to war in 1941,
 against class and punishing all who                                                             he eased up on his anti-business
 disagreed with him.”38                         but went along with the reduction                agenda, but a great deal of the
                                                of the personal exemption.41                     nation’s capital was diverted into
 Columnist Walter Lippmann                                                                       the war effort instead of into plant
 wrote in March 1938 that “with                 Meanwhile, the Federal Reserve                   expansion or consumer goods.
 almost no important exception                  again seesawed its monetary policy               Not until both Roosevelt and the
 every measure he [Roosevelt] has               in the mid-‘30s, first up then down,             war were gone did investors feel
 been interested in for the past                then up sharply through America’s                confident enough to “set in motion
 five months has been to reduce                 entry into World War II. Contrib-                the postwar investment boom that
 or discourage the production of                uting to the economic slide of 1937              powered the economy’s return to
 wealth.”39                                     was this fact: From the summer of                sustained prosperity.”42
                                                1936 to the spring of 1937, the Fed
 As pointed out earlier in this essay,          doubled reserve requirements on                  This view gains support in these
 Herbert Hoover’s own version of a              the nation’s banks. Experience has               comments from one of the coun-
 “New Deal” had hiked the top mar-              shown time and again that a roller-              try’s leading investors of the time,
 ginal income tax rate from 24 to 63            coaster monetary policy is enough                Lammot du Pont, offered in 1937:
 percent in 1932. But he was a piker            by itself to produce a roller-coaster
 compared to his tax-happy succes-              economy.                                           Uncertainty rules the tax situ-
 sor. Under Roosevelt, the top rate                                                                ation, the labor situation, the
 was raised at first to 79 percent and          Still stinging from his earlier Su-                monetary situation, and practi-
 then later to 90 percent. Economic             preme Court defeats, Roosevelt                     cally every legal condition under
 historian Burton Folsom notes that             tried in 1937 to “pack” the Supreme                which industry must operate.
 in 1941 Roosevelt even proposed a              Court with a proposal to allow the                 Are taxes to go higher, lower or
 whopping 99.5-percent marginal                 president to appoint an additional                 stay where they are? We don’t
 rate on all incomes over $100,000.             justice to the Court for every sitting             know. Is labor to be union or
 “Why not?” he said when an advi-               justice who had reached the age                    non-union? . . . Are we to have
 sor questioned the idea.40                     of 70 and did not retire. Had this                 inflation or deflation, more gov-
                                                proposal passed, Roosevelt could                   ernment spending or less? ... Are
 After that confiscatory proposal               have appointed six new justices                    new restrictions to be placed on
 failed, Roosevelt issued an execu-             favorable to his views, increasing                 capital, new limits on profits? ...
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    It is impossible to even guess at
                                                                           




    the answers.”43                                WHITHER FREE ENTERPRISE?
                                                How was it that FDR was elected
 Many modern historians tend to                 four times if his policies were deep-
 be reflexively anti-capitalist and             ening and prolonging an economic
 distrustful of free markets; they              catastrophe? Ignorance and a will-
 find Roosevelt’s exercise of power,            ingness to give the president the
 constitutional or not, to be impres-           benefit of the doubt explain a lot.
 sive and historically “interesting.”           Roosevelt beat Hoover in 1932 with
 In surveys, a majority consistently            promises of less government. He
 rank FDR near the top of the list for          instead gave Americans more gov-
 presidential greatness, so it is likely        ernment, but he did so with fanfare
 they would disdain the notion that             and fireside chats that mesmerized       SPEcIAL POWERS GRANTED to organized
 the New Deal was responsible for               a desperate people. By the time they     labor with the passage of the Wagner Act
                                                                                         contributed to a wave of militant strikes and a
 prolonging the Great Depression.               began to realize that his policies
                                                                                         “depression within a depression” in 1937.
 But when a nationally representa-              were harmful, World War II came,
 tive poll by the American Institute            the people rallied around their          government in the late 1920s and
 of Public Opinion in the spring                commander-in-chief, and there was        early 1930s. These policies included
 of 1939 asked, “Do you think the               little desire to change the proverbial   a litany of political missteps: cen-
 attitude of the Roosevelt adminis-             horse in the middle of the stream by     tral bank mismanagement, trade-
 tration toward business is delaying            electing someone new.                    crushing tariffs, incentive-sapping
 business recovery?” the American                                                        taxes, mind-numbing controls
 people responded “yes” by a mar-               Along with the holocaust of World        on production and competition,
 gin of more than two-to-one. The               War II came a revival of trade with      senseless destruction of crops and
 business community felt even more              America’s allies. The war’s destruc-     cattle, and coercive labor laws, to
 strongly so.44                                 tion of people and resources did         recount just a few. It was not the
                                                not help the U.S. economy, but this      free market which produced 12
 In his private diary, FDR’s very               renewed trade did. A reinflation of      years of agony; rather, it was politi-
 own Treasury Secretary, Henry                  the nation’s money supply coun-          cal bungling on a grand scale.
 Morgenthau, seemed to agree. He                teracted the high costs of the New
 wrote: “We have tried spending                 Deal, but brought with it a problem      Those who can survey the events
 money. We are spending more                    that plagues us to this day: a dol-      of the 1920s and 1930s and blame
 than we have ever spent before                 lar that buys less and less in goods     free-market capitalism for the
 and it does not work. ... We have              and services year after year. Most       economic calamity have their eyes,
 never made good on our promises.               importantly, the Truman adminis-         ears, and minds firmly closed to the
 ... I say after eight years of this            tration that followed Roosevelt was      facts. Changing the wrong-headed
 Administration we have just as                 decidedly less eager to berate and       thinking that constitutes much of
 much unemployment as when we                   bludgeon private investors and as        today’s conventional wisdom about
 started ... and an enormous debt               a result, those investors re-entered     this sordid historical episode is vital
 to boot!”45                                    the economy and fueled a powerful        to reviving faith in free markets
                                                postwar boom. The Great Depres-          and preserving our liberties.
 At the end of the decade and 12                sion finally ended, but it should
 years after the stock market crash             linger in our minds today as one of      The nation managed to survive
 of Black Thursday, 10 million                  the most colossal and tragic failures    both Hoover’s activism and Roos-
 Americans were jobless. The un-                of government and public policy in       evelt’s New Deal quackery, and
 employment rate was in excess of               American history.                        now the American heritage of free-
 17 percent. Roosevelt had pledged                                                       dom awaits a rediscovery by a new
 in 1932 to end the crisis, but it per-         The genesis of the Great Depres-         generation of citizens. This time we
 sisted two presidential terms and              sion lay in the irresponsible mon-       have nothing to fear but myths and
 countless interventions later.                 etary and fiscal policies of the U.S.    misconceptions. - E N D -
Mackinac Center for Public Policy | Great Myths of the Great Depression                  


                 ENDNOTES                                     Free Economy	by	Lewis	W.	Douglas,	as	quoted	      40	 	Folsom,	Burton,	“What’s	Wrong	With	The	
                                                              in	“Monetary	Central	Planning	and	the	State,	         Progressive	Income	Tax?”	Viewpoint on Public
                                                                                                                                              ,
1	 	Alan	Reynolds,	“What	Do	We	Know	About	                    Part	XIV:	The	New	Deal	and	Its	Critics,”	by	          Issues,	No.	99-18,	May	3,	1999,	Mackinac	
    the	Great	Crash?”	National Review,	November	              Richard	M.	Ebeling	in	Freedom Daily,	February	        Center	for	Public	Policy,	Midland,	Michigan.
    9,	1979,	p.	1416.                                         1998,	p.	12.                                      41	 	Ibid.
2	 	Hans	F.	Sennholz,	“The	Great	Depression,”	The       19	   	Friedman	and	Schwartz,	p.	330.                   42	 	Higgs,	p.	564.
    Freeman,	April	1975,	p.	205.
                                                        20	   	Jim	Powell,	FDR’s Folly: How Roosevelt and His   43	 	Quoted	in	Herman	E.	Krooss,	Executive
3	 	Murray	Rothbard,	America’s Great Depression	              New Deal Prolonged the Great Depression	(New	         Opinion: What Business Leaders Said and
    (Kansas	City:	Sheed	and	Ward,	Inc.,	1975),	p.	            York:	Crown	Forum,	2003),	p.	32.                      Thought on Economic Issues, 1920s-1960s	
    89.
                                                        21	   	John	Morton	Blum,	From the Morgenthau                (Garden	City,	N.Y.:	Doubleday	and	Co.,	1970),	
4	 	Benjamin	M.	Anderson,	Economics and the                   Diaries: Years of Crisis, 1928-1938	(Boston:	         p.	200.
    Public Welfare: A Financial and Economic                  Houghton	Mifflin	Company,	1959),	p.	70.           44	 	Higgs,	p.	577.
    History of the United States, 1914-46,	2nd	
                                                        22	   	Anderson,	p.	315.                                45	 	Blum,	pp.	24-25.
    edition	(Indianapolis:	Liberty	Press,	1979),	p.	
    127.                                                23	   	“FDR’s	Disputed	Legacy,”	p.	24.
                                                        24	   	Anderson,	p.	336.
5	 	Milton	Friedman	and	Anna	Jacobson	
    Schwartz,	A Monetary History of the United          25	   	Ibid.,	pp.	332-334.
                                                                                                                             PHOTO cREDITS
    States, 1867-1960	(New	York:	National	Bureau	                                                               Cover,	Artwork	based	on	a	poster	created	by	Works	
                                                        26	   	“FDR’s	Disputed	Legacy,”	p.	30.
    of	Economic	Research,	1963;	ninth	paperback	                                                                    Progress	Administration	between	1941	and	
    printing	by	Princeton	University	Press,	1993),	     27	   	John	T.	Flynn,	The Roosevelt Myth	(Garden	           1943.
    pp.	411-415.                                              City,	N.Y.:	Garden	City	Publishing	Co.,	Inc.,	
                                                                                                                Page	3,	Library	of	Congress,	Prints	and	Photographs	
                                                              1949),	p.	45.
6	 	Lindley	H.	Clark,	Jr.,	“After	the	Fall,”	The Wall                                                               Division,	[LC-USF34-T01-018258-C	DLC].
    Street Journal,	October	26,	1979,	p.	18.            28	   	C.	David	Tompkins,	Senator Arthur H.
                                                                                                                Page	4,	Federal	Reserve	Building,	Library	of	
                                                              Vandenberg: The Evolution of a Modern
7	 	“Tearful	Memories	That	Just	Won’t	Fade	                                                                         Congress,	Prints	and	Photographs	Division,	
                                                              Republican, 1884-1945	(East	Lansing,	MI:	
    Away,”	U. S. News & World Report,	October	29,	                                                                  Theodor	Horydczak	Collection	[LC-H814-T-
                                                              Michigan	State	University	Press,	1970),	p.	157.
    1979,	pp.	36-37.                                                                                                F03-003	DLC].
                                                        29	   	Ibid.,	p.	121.
8	 	“FDR’s	Disputed	Legacy,”	Time,	February	1,	                                                                 Page	5,	Unemployment,	Michigan	State	Archives.
    1982,	p.	23.                                        30	   	Albert	J.	Nock,	“Our	Enemy,	the	State	(online	
                                                                                                                Page	7,	Farm	Relief	Act,	Library	of	Congress,	
                                                              at	www.barefootsworld.net/nockets1.html),	
9	 	Barry	W.	Poulson,	Economic History of                                                                           National	Photo	Company	Collection,	[LC-
                                                              Chapter	1,	Section	IV.
    the United States	(New	York:	Macmillan	                                                                         USZ62-111718	DLC].
    Publishing	Co.,	Inc.,	1981),	p.	508.                31	   	Martin	Morse	Wooster,	“Bring	Back	the	
                                                                                                                Page	8,	Roosevelt,	Library	of	Congress,	Prints	and	
                                                              WPA?	It	Also	Had	A	Seamy	Side,”	Wall Street
10	 	Reynolds,	p.	1419.                                                                                             Photographs	Division	[LC-USZ62-117121	
                                                              Journal,	September	3,	1986,	p.	A26.
11	 	Richard	M.	Ebeling,	“Monetary	Central	                                                                         DLC].
                                                        32	   	Ibid.
    Planning	and	the	State-Part	XI:	The	Great	                                                                  Page	9,	Roosevelt,	Franklin	D.	Roosevelt	Library	
    Depression	and	the	Crisis	of	Government	            33	   	Johnson,	p.	762.                                     and	Museum.	
    Intervention,”	Freedom Daily	(Fairfax,	Virginia:	   34	   	Sennholz,	pp.	212-213.                           Page	11,	Bridge,	Library	of	Congress,	Prints	and	
    The	Future	of	Freedom	Foundation,	November	         35	   	William	E.	Leuchtenburg,	Franklin D. Roosevelt      Photographs	Division,	Historic	American	
    1997),	p.	15.                                             and the New Deal, 1932-1940	(New	York:	               Buildings	Survey	or	Historic	American	
12	 	Paul	Johnson,	A History of the American People	          Harper	and	Row,	1963),	p.	242.                        Engineering	Record,	Reproduction	Number	
    (New	York:	HarperCollins	Publishers,	1997),	p.	     36	   	Ibid.,	pp.	183-184.                                  [HAER,	TEX,42-VOS.V,4-].	
    740.                                                37	   	Robert	Higgs,	“Regime	Uncertainty:	Why	          Page	13,	Steel	Mill,	Library	of	Congress,	Prints	and	
13	 	Ibid.,	p.	741.                                           the	Great	Depression	Lasted	So	Long	and	              Photographs	Division,	Theodor	Horydczak	
14	 	Larry	Schweikart	and	Michael	Allen,	A	                   Why	Prosperity	Resumed	After	the	War,” The	           Collection	[LC-H814-T-0601	DLC].
    Patriot’s	History	of	the	United	States:	From	             Independent	Review,	Volume	I,	Number	4:	          Page	14,	Supreme	Court	Building,	Library	of	
    Columbus’s	Great	Discovery	to	the	War	on	                 Spring	1997,	p.	573.                                  Congress,	Prints	&	Photographs	Division,	FSA-
    Terror	(New	York:	Sentinel,	2004),	p.	553.          38	   	Gary	Dean	Best,	The Critical Press and the           OWI	Collection,	[LC-USF34-005615-E	DLC].
15	 	Ibid.,	p.	554.                                           New Deal: The Press Versus Presidential Power,    Page	15,	Strikers,	Archives	of	Labor	and	Urban	
16	 	“FDR’s	Disputed	Legacy,”	p.	24.                          1933-1938	(Westport,	Connecticut:	Praeger	            Affairs,	Wayne	State	University.
                                                              Publishers,	1993),	p.	130.
17	 	Sennholz,	p.	210.
                                                        39	   	Ibid.,	p.	136.
18	 	From	The Liberal Tradition: A Free People and a



                                                                  ABOuT THE AuTHOR

           Lawrence W. Reed has been                    newspapers and magazines including                      The Mackinac Center for Public Policy is
           president of the Mackinac                    The Wall Street Journal, Investor’s Business            dedicated to improving the understanding
           Center for Public Policy,                    Daily, Policy Review, The Detroit News, the             of economic and political principles among
           a nonprofit, nonpartisan                     Detroit Free Press, and dozens of other                 Michigan’s citizens, public officials, policy
           research and educational                     publications in the U. S. and abroad. In                makers, and opinion leaders. Under Reed’s
           institute headquartered in                   addition, he has written or edited five                 leadership, the Center has emerged as the
Midland, Michigan, since its founding                   books and delivered over 800 speeches                   largest and most prolific of more than 40
in 1988.                                                in 40 states and 10 foreign countries.                  state-based free-market “think tanks” in
                                                        His interests in political and economic                 America. More information about the
Reed holds degrees in economics and his-                affairs have taken him as a freelance                   Mackinac Center and its publications can
tory from Grove City College and Slippery               author to 63 countries on six continents                be found at www.mackinac.org.
Rock State University in Pennsylvania and               since 1985.                                             ©2005, Mackinac Center for Public Policy.
an honorary doctorate in public adminis-
tration from Central Michigan University.               He is a member of the board of directors
He taught economics at Northwood Uni-                   and a past president of the State Policy
versity from 1977 to 1984, serving as chair             Network, chairman of the board of trustees                  Mackinac Center for Public Policy
of the department from 1982 to 1984.                    of the Foundation for Economic Educa-                      140 West Main Street • P.O. Box 568
                                                        tion (FEE) in New York, and a regular                           Midland, Michigan 48640
Reed is author of over 1,000 columns                    columnist for FEE’s monthly magazine,                      (989) 631-0900 • Fax (989) 631-0964
and articles which have appeared in                     Ideas on Liberty.                                         www.mackinac.org • mcpp@mackinac.org

				
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