Great Myths of the Great Depression - CASCADE POLICY INSTITUTE
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CASCADE
POLICY
INSTITUTE
Great Myths
of the Great
Depression
by Lawrence W. Reed
October 2000About the Author
Lawrence W. Reed is an adjunct scholar to Cascade Policy Institute and has been presi-
dent of the Mackinac Center for Public Policy, a nonprofit, nonpartisan research and
educational institute headquartered in Midland, Michigan, since its founding in 1988.
Reed holds degrees in economics and history from Grove City College and Slippery Rock
State University in Pennsylvania and an honorary doctorate in public administration
from Central Michigan University. He taught economics at Northwood University from
1977 to 1984, serving as chair of the department from 1982 to 1984.
Reed is author of over 800 columns and articles which have appeared in newspapers and
magazines including Investor’s Business Daily, Policy Review, The Detroit News, the Detroit
Free Press, and dozens of other publications in the U. S. and abroad. In addition, he has
written or edited five books and delivered over 800 speeches in 40 states and 10 foreign
countries. His interests in political and economic affairs have taken him as a freelance
author to 54 countries on six continents since 1985.
Acknowledgments
Cascade Policy Institute extends its gratitude to the Mackinac Center for Public Policy
in Midland, Michigan for providing the original Great Myths of the Great Depression from
which this version is published. For more information about the Mackinac Center, refer
to www.mackinac.org, or call (517) 631-0900.
About Cascade
Founded in 1991, Cascade Policy Institute is Oregon’s premier policy research center.
Cascade’s mission is to explore and promote public policy alternatives that foster indi-
vidual liberty, personal responsibility and economic opportunity. To that end the Insti-
tute publishes policy studies, provides public speakers, organizes community forums
and sponsors educational programs. Focusing on state and local issues, Cascade offers
practical, innovative solutions for policy makers, the media and concerned citizens.
Cascade Policy Institute is a tax-exempt educational organization as defined under IRS
code 501(c)(3). Cascade neither solicits nor accepts government funding, and is sup-
ported by individual, foundation, and corporate contributions. Nothing appearing in
this document is to be construed as necessarily representing the views of Cascade, or as
an attempt to aid or hinder the passage of any bill before any legislative body.
Ordering Information
To order additional copies of this essay call Cascade Policy Institute at (503) 242-0900 or
write info@cascadepolicy.org. Quantity discounts available, with special discounts for
educators.
Copyright © 2000 by Cascade Policy Institute. All rights reserved.
iiContents
About the Author ............................................................................. ii
Acknowledgments .......................................................................... ii
About Cascade ................................................................................ ii
Introduction ...................................................................................... 1
Phase I: The business cycle .......................................................... 2
Phase II: Disintegration of the world economy ........................... 5
Phase III: The New Deal .................................................................. 8
Phase IV: The Wagner Act ............................................................. 15
Notes ............................................................................................... 20
Photo Credits ................................................................................. 22
iiivi
Introduction tion, it is there you will find, decked in all its The popular ac-
arrogant splendor, what may be the twenti- count of the
Many volumes have been written about the eth century’s greatest myth: Capitalism and
Great Depression of 1929-1941 and its im- the free-market economy were responsible for
Depression be-
pact on the lives of millions of Americans. the Great Depression, and only government longs in a book of
Historians, economists, and politicians have intervention brought about America’s economic fairy tales and not
all combed the wreckage searching for the recovery. in a serious discus-
“black box” that will reveal the cause of this sion of economic
legendary tragedy. Sadly, all too many of them A modern fairy tale history, as a review
decide to abandon their search, finding it Students today are frequently taught that
easier perhaps to circulate a host of false and unfettered free enterprise collapsed of its
of the facts dem-
harmful conclusions about the events of own weight in 1929, paving the way for a onstrates.
seven decades ago. Consequently, many decade-long economic depression full of
people today continue to accept critiques of hardship and misery. The story is typically
free-market capitalism that are unjustified presented as follows: An important pillar of
and support government policies that are capitalism, the stock market, crashed and
economically destructive. dragged America into depression. President
Herbert Hoover, an advocate of “hands-off,”
How bad was the Great Depression? Over or laissez-faire, economic policy, refused to
the four years from 1929 to 1933, produc- use the power of government to intervene
tion at the nation’s factories, mines, and utili- in the economy and conditions worsened as
ties fell by more than half. People’s real a result. It was up to Hoover’s successor,
disposable incomes dropped 28 percent. Franklin Delano Roosevelt, to ride in on the
Stock prices collapsed to one-tenth of their white horse of government intervention and
pre-crash height. The number of unem- steer the nation toward recovery. The ap-
ployed Americans rose from 1.6 million in parent lesson to be drawn is that capitalism
1929 to 12.8 million in 1933. One of every cannot be trusted; government needs to take
four workers was out of a job at the an active role in the economy to save us from
Depression’s nadir, and ugly rumors of re- catastrophe.
volt simmered for the first time since the
Civil War. But those who propagate this version of his-
tory might just as well top off their remarks
“The terror of the Great Crash has been the by saying, “And Goldilocks found her way
failure to explain it,” writes economist Alan out of the forest, Dorothy made it from Oz
Reynolds. “People were left with the feeling back to Kansas, and Little Red Riding Hood
that massive economic contractions could won the New York State Lottery.” The popu-
occur at any moment, without warning, lar account of the Depression as outlined
without cause. That fear has been exploited above belongs in a book of fairy tales and
ever since as the major justification for vir- not in a serious discussion of economic his-
tually unlimited federal intervention in eco- tory, as a review of the facts demonstrates.
nomic affairs.”1
The Great, Great, Great, Depression
Old myths never die; they just keep showing To properly understand the events of the
up in college economics and political science time, it is factually appropriate to view the
textbooks. With only an occasional excep- Great Depression as not one, but four con-
1The calamity that secutive depressions rolled into one. Profes- economy for years with depreciating sil-
began in 1929 sor Hans Sennholz has labeled these four ver and paper notes.
“phases” as follows:2
lasted at least three • And in 1921, a brief but sharp tumble
times longer than I. The business cycle took place after several years of credit and
any of the coun- II. The disintegration of the world economy currency expansion to accommodate the
try’s previous de- III.The New Deal spending for World War I.
pressions because IV. The Wagner Act
the government The common thread woven through all of
The first phase explains why the crash of these earlier debacles was disastrous ma-
compounded its 1929 happened in the first place; the other nipulation of the money supply by govern-
monetary errors three show how government intervention ment. For various reasons, government
with a series of kept the economy in a stupor for over a de- policies were adopted which ballooned the
harmful interven- cade. Let’s consider each one in turn. quantity of money and credit in the economy.
tions. A boom resulted, followed later by a painful
Phase I: The business cycle day of reckoning. None of these depressions,
however, lasted more than four years and
The Great Depression was not the country’s most of them were over in two. The calam-
first depression, though it proved to be the ity that began in 1929 lasted at least three
longest. Several others preceded it. times longer than any of the country’s pre-
vious depressions because the government
• In 1819, after three years of currency in- compounded its monetary errors with a se-
flation caused by the federally chartered ries of harmful interventions.
Second Bank of the United States, the
economy fell apart. Pumping up the volume
Most monetary economists, particularly
• The slump of 1836-37 occurred as the those of the “Austrian School,” have observed
inflationary distortions of the central the close relationship between money sup-
bank era were liquidated when President ply and economic activity. When government
Andrew Jackson prevented the re-char- inflates the money and credit supply, inter-
ter of the Second Bank, calling it a “money est rates at first fall. Businesses invest this
monster.” “easy money” in new production projects and
a boom takes place in capital goods. As the
• In 1857 the economy retrenched after a boom matures, business costs rise, interest
decade of money and credit expansion on rates readjust upward, and profits are
behalf of state governments that had squeezed. The easy-money effects thus wear
forced their debt obligations onto the off and the monetary authorities, fearing
state banking systems. price inflation, slow the growth of, or even
contract, the money supply. In either case,
• In 1873, a post-Civil War downturn fol- the manipulation is enough to knock out the
lowed the excesses of the government’s shaky supports from underneath the eco-
rampant “greenback” inflation. nomic house of cards.
• The Panic and Depression of 1893-95 hit This basic business cycle outline applies as
the country after Congress force-fed the perfectly to the events of the 1920s as it does
2The flood of money drove interest rates Professor Roth-
down, pushed the stock market to dizzy bard estimated
heights, and gave birth to the “Roaring Twen-
ties.” The economy was having a party, the
that the money
Federal Reserve was spiking the punch, and supply was bloated
a good time was had by almost all. by more than 60
percent from mid-
Few could read the handwriting on the wall. 1921 to mid-1929.
Relatively stable prices in the 1920s masked
the monetary inflation to a considerable ex-
tent and lulled many people into thinking
that the situation was sustainable. Substan-
People who argue that the free-market economy
collapsed of its own weight in the 1930s seem utterly tial cuts in income tax rates enacted in the
unaware of the critical role played by the Federal Coolidge years spurred investment and real
Reserve System’s gross mismanagement of money
and credit. economic growth, which in turn yielded a
burst of technological advancement and en-
to all of the earlier boom-bust cycles in U.S. trepreneurial discoveries of cheaper ways to
history. The fingerprints on the door to the produce goods. This explosion in produc-
Great Depression belong primarily to the tivity offset much of the Fed’s inflationary
“money monster” of the twentieth century: impact on prices (with the notable excep-
the Federal Reserve System, known also as tions of stocks and Florida land).
the “Fed.”
But the distortions and bad investments be-
One of the most thorough and meticulously ing fostered by the monetary inflation would
documented accounts of the Fed’s inflation- sooner or later have to be corrected. Every
ary actions prior to 1929 is America’s Great artificial money and credit expansion intro-
Depression by Professor Murray Rothbard. duces imbalances in economic relationships
Using a broad measure that includes cur- that send false signals and set the economy
rency, demand and time deposits, and other up for an eventual fall—a fall that is only
ingredients, Rothbard estimated that the made worse when government shifts its
money supply was bloated by more than 60 policy from one of monetary ease to mon-
percent from mid-1921 to mid-1929.3 etary contraction.
Reckless money and credit expansion con- The bottom drops out
stituted what economist Benjamin M. Ander- By late 1928, it was becoming clear that the
son called “the beginning of the New Deal”4 Federal Reserve was taking the punch away
—the name for the better-known but highly from the party. It choked off the money sup-
interventionist policies that would come later ply and raised interest rates. For example,
under President Franklin Roosevelt. The the discount rate (the rate the Fed charges
monetary authorities were actively manipu- member banks for loans) was increased four
lating the economy, partly to stimulate a times, from 3.5 percent to 6 percent, between
boom at home and partly to assist the Bank January 1928 and August 1929. For the next
of England in its professed desire to main- three years, the Fed presided over a money
tain pre-World War I exchange rates. supply that actually shrank by 30 percent!
This deflation following the inflation
3The contraction of wrenched the economy from tremendous
the nation’s boom to colossal bust. A few observers ar-
gue that this horrendous deflation was the
money supply by Fed’s intent all along, but most economists
one-third between believe that the Fed badly miscalculated. The
August 1929 and result is a manifest failure of government
March 1933 was monetary policy in either case.
an enormous drag
on the economy The most comprehensive chronicle of the
monetary policies of the period can be found
and largely the re- in the classic work of Nobel Laureate Milton
sult of seismic Friedman and his colleague Anna Schwartz, Men wait outside the Public Employment Bureau in
Portland, Oregon in 1934. Though Roosevelt has
incompetence by A Monetary History of the United States, been lauded for his “job-creating” acts, his tinkering
helped prolong the Great Depression and prevented
the Fed. 1867-1960. Friedman and Schwartz argue the jobless from finding real jobs in the first place.
conclusively that the contraction of the
nation’s money supply by one-third between Tuesday. As early as September 5, stocks were weak
August 1929 and March 1933 was an enor- in heavy trading, after having moved into new high
mous drag on the economy and largely the ground two days earlier. Declines in early October
result of seismic incompetence by the Fed. were called a “desirable correction.” The Wall Street
The death in October 1928 of Benjamin Journal, predicting an autumn rally, noted that “some
Strong, a powerful figure who had exerted stocks rise, some fall.”
great influence as head of the Fed’s New York
district bank, left the Fed floundering with- Then, on October 3, stocks suffered their worst pum-
out capable leadership—making bad policy meling of the year. Margin calls went out; some trad-
even worse.5 ers grew apprehensive. But the next day, prices rose
again and thereafter seesawed for a fortnight.
At first, only the “smart” money—the Ber-
nard Baruchs and the Joseph Kennedys who The real crunch began on Wednesday, October 23,
watched things like money supply—saw that with what one observer called “a Niagara of liquida-
the party was coming to an end. Baruch ac- tion.” Six million shares changed hands. The indus-
tually began selling stocks and buying bonds trial average fell 21 points. “Tomorrow, the turn will
and gold as early as 1928; Kennedy did like- come,” brokers told one another. Prices, they said,
wise, commenting, “only a fool holds out for had been carried to “unreasonably low” levels.
the top dollar.”6
But the next day, Black Thursday, stocks were
The masses of investors eventually sensed dumped in even heavier selling . . . the ticker fell
the change in Fed policy and then the stam- behind more than 5 hours, and finally stopped grind-
pede was underway. In a special issue com- ing out quotations at 7:08 p.m.7
memorating the 50th anniversary of the
stock market collapse, U. S. News & World At their peak, stocks in the Dow Jones In-
Report described it this way: dustrial Average were selling for 19 times
earnings—somewhat high, but hardly what
Actually the Great Crash was by no means a one- stock market analysts regard as a sign of in-
day affair, despite frequent references to Black Thurs- ordinate speculation. The distortions in the
day, October 24, and the following week’s Black economy promoted by the Fed’s monetary
4policy had set the country up for a reces- ston Churchill. He had invested heavily in Congress was play-
sion, but other policies and impositions to American stocks before the crash. Afterward, ing with fire at the
come would soon turn the recession into a only his writing skills and positions in gov-
full-scale disaster. Congress was playing with ernment restored his finances.
same time stocks
fire at the same time stocks were taking a were taking a beat-
beating: On the very morning of Black Clarence Birdseye, an early developer of ing: On the very
Thursday, the nation’s newspapers reported packaged frozen foods, sold his business for morning of Black
that the political forces for higher trade-dam- $30 million and put all his money into stocks. Thursday, the
aging tariffs were making gains on Capitol He was wiped out. nation’s newspa-
Hill. The stock market crash was only a
symptom—not the cause—of the Great De- William C. Durant, founder of General Mo-
pers reported that
pression: The market rose and fell in almost tors, lost more than $40 million in the stock the political forces
direct synchronization with what the Fed market and wound up a virtual pauper. (GM for higher trade-
and Congress were doing. itself stayed in the black throughout the damaging tariffs
Depression under the cost-cutting leader- were making gains
Buddy, can you spare $40 million? ship of Alfred P. Sloan.) on Capitol Hill.
Oregon was not afflicted to the same degree
as other states by the Great Depression be- Jesse Livermore, one of the big-time specu-
cause it was less dependent on such hard- lators of the era, shot himself. A few others
hit industries as automotives, steel and did the same or jumped from windows: The
textiles. 8 Relative measurements of pain suicide rate rose until 1932.
aside, the economic malaise in the years fol-
lowing Black Thursday exacted its toll from Members of the prominent Oregon families
Oregonians. Kerr, Macleay, Collins and Ainsworth, all
large stockholders in the U.S. National Bank,
In slightly more than one year, the “volume saw their net worth plunge, according to his-
of business dropped off drastically, register- torian E. Kimbark MacColl. In 1927, U.S.
ing a 20 percent decline in Oregon through National Bank stock hit a high of $405; by
December 1930.”9 From 1929 to 1932, the 1935, shares were at a $30 low. Likewise, the
earnings for Oregon’s manufacturing sector Corbetts, Failings and Lewises experienced
dropped 62 percent. From 1929 to 1933, the a similar fate with investments in First Na-
state’s construction industry saw total earn- tional Bank.13
ings drop 71 percent.10 Oregon’s lumber in-
dustry, suffering from a sales slump prior to Though the modern myth claims that the
the stock crash,11 was further hurt. In Au- free market “self-destructed” in 1929, the
gust 1930, the Oregon State Board of For- wild manipulation of the currency by the
estry reported that 47 per cent “of all logging Federal Reserve shows that government, far
camps in state units are shut down with the from a disinterested bystander, was the prin-
output 53 per cent below normal,” and there cipal culprit of the stock market crash.
was a “shutdown of 63 per cent of the mills,
with a 62 per cent reduction in cut.”12 Phase II: Disintegration of the
world economy
Thousands of investors everywhere, includ-
ing many well-known people, were hit hard If this crash had been like previous ones, the
in the 1929 crash. Among them was Win- hard times would have ended in three years
5The crowning folly at the most, and likely sooner than that. But describes the scope of the act:
of the Hoover ad- unprecedented political bungling instead
prolonged the misery for over 10 years. The act raised the rates on the entire range of duti-
ministration was able commodities; for example, the average rate in-
the Smoot-Hawley Unemployment in 1930 averaged a mildly creased from 20 percent to 34 percent on agricultural
Tariff, the most recessionary 8.9 percent, up from 3.2 per- products; from 36 percent to 47 percent on wines,
protectionist legis- cent in 1929. It shot up rapidly until peak- spirits, and beverages; from 50 to 60 percent on wool
lation in U.S. ing out at more than 25 percent in 1933. and woolen manufactures. In all, 887 tariffs were
history, which vir- Until March of 1933, these were the years sharply increased and the act broadened the list of
of President Herbert Hoover—the man that dutiable commodities to 3,218 items. A crucial part
tually closed the anti-capitalists depict as a champion of non- of the Smoot-Hawley Tariff was that many tariffs
borders to foreign interventionist, laissez-faire economics. were for a specific amount of money rather than a
goods and ignited percentage of the price. As prices fell by half or more
a vicious interna- “The greatest spending during the Great Depression, the effective rate of
tional trade war. administration in all of history” these specific tariffs doubled, increasing the protec-
Did Hoover really subscribe to a “hands off tion afforded under the act.15
the economy,” free-market philosophy? His
opponent in the 1932 election, Franklin Smoot-Hawley was as broad as it was deep,
Roosevelt, didn’t think so. During the cam- affecting a multitude of products. Before its
paign, Roosevelt blasted Hoover for spend- passage, clocks had faced a tariff of 45 per-
ing and taxing too much, boosting the cent; the act raised that to 55 percent, plus
national debt, choking off trade, and put- as much as another $4.50 per clock. Tariffs
ting millions on the dole. He accused the on corn and butter were roughly doubled.
president of “reckless and extravagant” Even sauerkraut was tariffed for the first
spending, of thinking “that we ought to cen- time. Among the few remaining tariff-free
ter control of everything in Washington as goods, strangely enough, were leeches and
rapidly as possible,” and of presiding over “the skeletons (perhaps as a political sop to the
greatest spending administration in peace- American Medical Association, as one wag
time in all of history.” Roosevelt’s running wryly remarked).
mate, John Nance Garner, charged that
Hoover was “leading the country down the Tariffs on linseed oil, tungsten, and casein
path of socialism.”14 Contrary to the mod- hammered the U. S. paint, steel, and paper
ern myth about Hoover, Roosevelt and Gar- industries, respectively. More than 800 items
ner were absolutely right. used in automobile production were taxed
by Smoot-Hawley. Most of the 60,000 people
The crowning folly of the Hoover adminis- employed in U. S. plants making cheap cloth-
tration was the Smoot-Hawley Tariff, passed ing out of imported wool rags went home
in June 1930. It came on top of the Fordney- jobless after the tariff on wool rags rose by
McCumber Tariff of 1922, which had already 140 percent.16
put American agriculture in a tailspin dur-
ing the preceding decade. The most protec- Officials in the administration and in Con-
tionist legislation in U.S. history, gress believed that raising trade barriers
Smoot-Hawley virtually closed the borders would force Americans to buy more goods
to foreign goods and ignited a vicious inter- made at home, which would solve the nag-
national trade war. Professor Barry Poulson ging unemployment problem. But they ig-
6With the collapse of agriculture, The shrinkage in
rural banks failed in record num- world trade
bers, dragging down hundreds of
thousands of their customers.
brought on by the
Nine thousand banks closed tariff wars helped
their doors in the United States set the stage for
between 1930 and 1933; among World War II a few
those that closed were 41 state years later.
chartered banks in Oregon.18 The
stock market, which had re-
gained much of the ground it had
lost since the previous October,
President Herbert Hoover is mistakenly presented in standard
history texts as a laissez-faire president, but he signed into law so
tumbled 20 points on the day
many costly and foolish bills that one of Franklin Roosevelt’s top Hoover signed Smoot-Hawley
aides later said that “practically the whole New Deal was
extrapolated from programs that Hoover started.”
into law and fell almost without
respite for the next two years.
nored an important principle of international (The market’s high, as measured by the Dow
commerce: Trade is ultimately a two-way Jones Industrial Average, was set on Septem-
street; if foreigners cannot sell their goods ber 3, 1929, at 381. The Dow hit its 1929
here, then they cannot earn the dollars they low of 198 on November 13, then rebounded
need to buy here. Or, to put it another way, to 294 by April 1930. It declined again as the
government cannot shut off imports with- tariff bill made its way toward Hoover’s desk
out simultaneously shutting off exports. in June and did not bottom out until it
reached a mere 41 two years later. It would
You tax me, I tax you be a quarter-century before the Dow would
Foreign companies and their workers were climb to 381 again.)
flattened by Smoot-Hawley’s steep tariff rates
and foreign governments soon retaliated with The shrinkage in world trade brought on by
trade barriers of their own. With their abil- the tariff wars helped set the stage for World
ity to sell in the American market severely War II a few years later. In 1929, the rest of
hampered, they curtailed their purchases of the world owed American citizens $30 bil-
American goods. American agriculture was lion. Germany’s Weimar Republic was strug-
particularly hard hit. With a stroke of the gling to pay the enormous reparations bill
presidential pen, farmers in this country lost imposed by the disastrous Treaty of
nearly a third of their markets. Farm prices Versailles. When tariffs made it nearly im-
plummeted and tens of thousands of farm- possible for foreign businessmen to sell their
ers went bankrupt. A bushel of wheat that goods in American markets, the burden of
sold for $1.00 in 1929 was selling for a mere their debts became massively heavier and
30 cents by 1932. Oregon farmers, as a emboldened demagogues like Adolf Hitler.
group, saw total personal income drop from “When goods don’t cross frontiers, armies
$80 million in 1929 to $38 million in 1932. will,” warns an old but painfully true eco-
Total personal farm income in Oregon did nomic maxim.
not equal or surpass its 1929 mark for more
than a decade.17 Free markets or free lunches?
Smoot-Hawley by itself should lay to rest the
7Compounding the myth that Hoover was a free market advo- four months and sizable, deflationary de-
error of high tar- cate, but there is even more to the story of clines in the nation’s money supply persisted
his administration’s interventionist mistakes. through the first half of 1932.
iffs, huge subsidies,
Within a month of the stock market crash,
and deflationary he convened conferences of business lead- Compounding the error of high tariffs, huge
monetary policy, ers for the purpose of jawboning them into subsidies, and deflationary monetary policy,
Congress then keeping wages artificially high even though Congress then passed and Hoover signed the
passed and Hoover both profits and prices were falling. Con- Revenue Act of 1932. It doubled the income
signed the Rev- sumer prices plunged almost 25 percent be- tax for most Americans; the top bracket
tween 1929 and 1933 while nominal wages more than doubled, going from 24 percent
enue Act of 1932. It
on average decreased only 15 percent— to 63 percent. Exemptions were lowered; the
doubled the in- translating into a substantial increase in earned income credit was abolished; corpo-
come tax for most wages in real terms, a major component of rate and estate taxes were raised; new gift,
Americans. the cost of doing business. As Hillsdale Col- gasoline, and auto taxes were imposed; and
lege economist Richard Ebeling notes, “The postal rates were sharply hiked.
‘high-wage’ policy of the Hoover adminis-
tration and the trade unions . . . succeeded Can any serious scholar observe the Hoover
only in pricing workers out of the labor mar- administration’s massive economic interven-
ket, generating an increasing circle of un- tion and, with a straight face, pronounce the
employment.”19 inevitably deleterious effects as the fault of
free markets?
Hoover dramatically increased government
spending for subsidy and relief schemes. In Phase III: The New Deal
the space of one year alone, from 1930 to
1931, the federal government’s share of GNP Franklin Delano Roosevelt won the 1932
soared from 16.4 percent to 21.5 percent.20 presidential election in a landslide, collect-
Hoover’s agricultural bureaucracy doled out ing 472 electoral votes to just 59 for the in-
hundreds of millions of dollars to wheat and cumbent Herbert Hoover. The platform of
cotton farmers even as the new tariffs wiped the Democratic Party, whose ticket Roosevelt
out their markets. His Reconstruction Fi- headed, declared, “We believe that a party
nance Corporation ladled out billions more platform is a covenant with the people to be
in business subsidies. Commenting decades faithfully kept by the party entrusted with
later on Hoover’s administration, Rexford power.” It called for a 25-percent reduction
Guy Tugwell, one of the architects of in federal spending, a balanced federal bud-
Franklin Roosevelt’s policies of the 1930s, get, a sound gold currency “to be preserved
explained, “We didn’t admit it at the time, at all hazards,” the removal of government
but practically the whole New Deal was ex- from areas that belonged more appropriately
trapolated from programs that Hoover to private enterprise, and an end to the “ex-
started.”21 travagance” of Hoover’s farm programs. This
is what candidate Roosevelt promised, but it
In September 1931, with the money supply bears no resemblance to what President
tumbling and the economy reeling from the Roosevelt actually delivered.
impact of Smoot-Hawley, the Fed imposed
the biggest hike in its discount rate in his- Washington was rife with both fear and op-
tory. Bank deposits fell 15 percent within timism as Roosevelt was sworn in on March
84, 1933—fear that the economy might not Roosevelt did in-
recover and optimism that the new and as- deed make a
sertive president just might make a differ-
ence. Humorist Will Rogers captured the
difference. As a
popular feeling toward “FDR” as he as- result of his efforts,
sembled the new administration: “The whole the economy
country is with him, just so he does some- would linger in
thing. If he burned down the Capitol, we depression for the
would all cheer and say, well, we at least got rest of the decade.
a fire started anyhow.”22
“Nothing to fear but fear itself”
Roosevelt did indeed make a difference,
though probably not the sort of difference
for which the country had hoped. He started
off on the wrong foot when, in his inaugu-
ral address, he blamed the Depression on
“unscrupulous money changers” and said
nothing about the role of the Fed’s misman-
agement and little about the follies of Con- Americans voted for Franklin Roosevelt in 1932
expecting him to adhere to the Democratic Party
gress that had contributed to the problem. platform, which called for less government spending
As a result of his efforts, the economy would and regulation.
linger in depression for the rest of the de- At Harvard University in May 1935, Dou-
cade. Adapting a phrase from nineteenth- glas made it plain that America was facing a
century writer Henry David Thoreau, momentous choice:
Roosevelt famously declared in his inaugu-
ral address that, “We have nothing to fear Will we choose to subject ourselves—this great coun-
but fear itself.” But as Professor Sennholz try—to the despotism of bureaucracy, controlling
explains, it was FDR’s policies to come that our every act, destroying what equality we have at-
Americans had genuine reason to fear: tained, reducing us eventually to the condition of
impoverished slaves of the state? Or will we cling to
In his first 100 days, he swung hard at the profit the liberties for which man has struggled for more
order. Instead of clearing away the prosperity barri- than a thousand years? It is important to under-
ers erected by his predecessor, he built new ones of stand the magnitude of the issue before us . . . . If we
his own. He struck in every known way at the integ- do not elect to have a tyrannical, oppressive bureau-
rity of the U. S. dollar through quantitative increases cracy controlling our lives, destroying progress, de-
and qualitative deterioration. He seized the people’s pressing the standard of living . . . then should it not
gold holdings and subsequently devalued the dollar be the function of the Federal government under a
by 40 percent.23 democracy to limit its activities to those which a
democracy may adequately deal, such for example
Frustrated and angered that Roosevelt had as national defense, maintaining law and order, pro-
so quickly and thoroughly abandoned the tecting life and property, preventing dishonesty, and
platform on which he was elected, Director . . . guarding the public against . . . vested special
of the Bureau of the Budget Lewis W. Dou- interests?24
glas resigned after only one year on the job.
9One morning, as New dealing from the bottom of the Roosevelt’s rejection of it removed most of
Roosevelt ate eggs deck the remaining impediments to limitless cur-
Crisis gripped the banking system when the rency and credit expansion, for which the
in bed, he and Sec-
new president assumed office on March 4, nation would pay a high price in later years
retary of the 1933. Roosevelt’s action to close the banks in the form of a depreciating currency. Sena-
Treasury Henry and declare a nationwide “banking holiday” tor Carter Glass put it well when he warned
Morgenthau de- on March 6 (which did not completely end Roosevelt in early 1933: “It’s dishonor, sir.
cided to change the until nine days later) is still hailed as a deci- This great government, strong in gold, is
ratio between gold sive and necessary action by Roosevelt apolo- breaking its promises to pay gold to widows
gists. Friedman and Schwartz, however, make and orphans to whom it has sold govern-
and paper dollars.
it plain that this supposed cure was “worse ment bonds with a pledge to pay gold coin of
After weighing his than the disease.” The Smoot-Hawley tariff the present standard of value. It is breaking
options, Roosevelt and the Fed’s unconscionable monetary mis- its promise to redeem its paper money in gold
settled on a 21- chief were primary culprits in producing the coin of the present standard of value. It’s dis-
cent price hike conditions that gave Roosevelt his excuse to honor, sir.”27
because “it’s a temporarily deprive depositors of their
money, and the bank holiday did nothing to Though he seized the country’s gold,
lucky number.”
alter those fundamentals. “More than 5,000 Roosevelt did return booze to America’s bars
banks still in operation when the holiday was and parlor rooms. On his second Sunday in
declared did not reopen their doors when it the White House, he remarked at dinner, “I
ended, and of these, over 2,000 never did think this would be a good time for beer.”28
thereafter,” report Friedman and Schwartz.25 That same night, he drafted a message ask-
ing Congress to end Prohibition. The House
Congress gave the president the power first approved a repeal measure on Tuesday, the
to seize the private gold holdings of Ameri- Senate passed it on Thursday and before the
can citizens and then to fix the price of gold. year was out, enough states had ratified it so
One morning, as Roosevelt ate eggs in bed, that the 21st Amendment became part of the
he and Secretary of the Treasury Henry Constitution. One observer, commenting on
Morgenthau decided to change the ratio be- this remarkable turn of events, noted that
tween gold and paper dollars. After weigh- of two men walking down the street at the
ing his options, Roosevelt settled on a start of 1933—one with a gold coin in his
21-cent price hike because “it’s a lucky num- pocket and the other with a bottle of whis-
ber.” In his diary, Morgenthau wrote, “If any- key in his coat—the man with the coin would
body ever knew how we really set the gold be an upstanding citizen and the man with
price through a combination of lucky num- the whiskey would be the outlaw. A year
bers, I think they would be frightened.”26 later, precisely the reverse was true.
Roosevelt also single-handedly torpedoed the
London Economic Conference in 1933, In the first year of the New Deal, Roosevelt
which was convened at the request of other proposed spending $10 billion while rev-
major nations to bring down tariff rates and enues were only $3 billion. Between 1933
restore the gold standard. and 1936, government expenditures rose by
more than 83 percent. Federal debt skyrock-
The federal government and its reckless cen- eted by 73 percent.
tral bank had already made mincemeat of
the gold standard by the early 1930s. He talked Congress into creating Social Se-
10curity in 1935 and imposing the nation’s first According to The Oregonian, he held the New Roosevelt secured
comprehensive minimum wage law in 1938. Deal “overwhelmingly responsible for seven passage of the
While Roosevelt to this day gets a great deal years of failure to restore the nation to tra-
of credit for these two measures from the ditional prosperity and happiness.”30 “There
Agricultural Ad-
general public, many economists have a dif- is no doubt in my mind,” McNary said, “that justment Act,
ferent perspective. The minimum wage law because of this effort to make legislative ex- which levied a new
prices many of the inexperienced, the young, periments permanent the country is uncer- tax on agricultural
the unskilled, and the disadvantaged out of tain, commerce is choked, money is frozen processors and
the labor market. (For example, the mini- and recovery, generally, is being retarded.”31 used the revenue to
mum wage provisions passed as part of an-
other act in 1933 threw an estimated 500,000 Blue eagles, red ducks
supervise the
blacks out of work.)29 And current studies Perhaps the most radical aspect of the New wholesale destruc-
and estimates reveal that Social Security has Deal was the National Industrial Recovery tion of valuable
become such a long-term actuarial night- Act (NIRA), passed in June 1933, which cre- crops and cattle.
mare that it will either have to be privatized ated a massive new bureaucracy called the
or the already high taxes needed to keep it National Recovery Administration. Under the
afloat will have to be raised to the strato- NRA, most manufacturing industries were
sphere. suddenly forced into government-mandated
Roosevelt secured passage of the Agricultural
Adjustment Act (AAA), which levied a new
tax on agricultural processors and used the
revenue to supervise the wholesale destruc-
tion of valuable crops and cattle. Federal
agents oversaw the ugly spectacle of perfectly
good fields of cotton, wheat, and corn being
plowed under (the mules had to be con-
vinced to trample the crops; they had been
trained, of course, to walk between the
rows). Healthy cattle, sheep, and pigs were
slaughtered and buried in mass graves. Sec-
retary of Agriculture Henry Wallace person-
ally gave the order to slaughter six million
baby pigs before they grew to full size. The
administration also paid farmers for the first
time for not working at all. Even if the AAA
had helped farmers by curtailing supplies and
raising prices, it could have done so only by
hurting millions of others who had to pay
those prices or make do with less to eat.
Oregon’s U.S. Senator Charles McNary, who Oregon Senator Charles McNary, commenting about
the New Deal, said there was no doubt in his mind
held no reason “to condemn the new deal in “that because of this effort to make legislative
its entirety,” grew weary of policies that were experiments permanent the country is uncertain,
commerce is choked, money is frozen and recovery,
prolonging the country’s economic problems. generally, is being retarded.”
11A New Jersey tailor The man Roosevelt picked to direct the NRA
named Jack Magid effort was General Hugh “Iron Pants”
Johnson, a profane, red-faced bully and pro-
was arrested and
fessed admirer of Italian dictator Benito
sent to jail for the Mussolini. Thundered Johnson, “May Al-
“crime” of press- mighty God have mercy on anyone who at-
ing a suit of clothes tempts to interfere with the Blue Eagle” (the
for 35 cents rather official symbol of the NRA, which one sena-
than the National tor derisively referred to as the “Soviet duck”).
Those who refused to comply with the NRA
Recovery Admin-
Johnson personally threatened with public
istration-inspired boycotts and “a punch in the nose.”
“Tailor’s Code” of
40 cents. There were ultimately more than 500 NRA
To many Americans, the National Recovery codes, “ranging from the production of light-
Administration’s bureaucracy and mind-numbing
regulations became known as the “National Run ning rods to the manufacture of corsets and
Around.” brassieres, covering more than 2 million
employers and 22 million workers.”33 There
cartels. Codes that regulated prices and terms were codes for the production of hair tonic,
of sale briefly transformed much of the dog leashes, and even musical comedies. A
American economy into a fascist-style ar- New Jersey tailor named Jack Magid was ar-
rangement, while the NRA was financed by rested and sent to jail for the “crime” of press-
new taxes on the very industries it con- ing a suit of clothes for 35 cents rather than
trolled. Some economists have estimated that the NRA-inspired “Tailor’s Code” of 40 cents.
the NRA boosted the cost of doing business
by an average of 40 percent—not something In The Roosevelt Myth, historian John T.
a depressed economy needed for recovery. Flynn described how the NRA’s partisans
sometimes conducted “business”:
The economic impact of the NRA was im-
mediate and powerful. In the five months The NRA was discovering it could not enforce its
leading up to the act’s passage, signs of re- rules. Black markets grew up. Only the most violent
covery were evident: factory employment and police methods could procure enforcement. In Sidney
payrolls had increased by 23 and 35 percent, Hillman’s garment industry the code authority em-
respectively. Then came the NRA, shorten- ployed enforcement police. They roamed through
ing hours of work, raising wages arbitrarily, the garment district like storm troopers. They could
and imposing other new costs on enterprise. enter a man’s factory, send him out, line up his em-
In the six months after the law took effect, ployees, subject them to minute interrogation, take
industrial production dropped 25 percent. over his books on the instant. Night work was for-
Benjamin M. Anderson writes, “NRA was not bidden. Flying squadrons of these private coat-and-
a revival measure. It was an antirevival mea- suit police went through the district at night, battering
sure . . . . Through the whole of the NRA down doors with axes looking for men who were
period industrial production did not rise as committing the crime of sewing together a pair of
high as it had been in July 1933, before NRA pants at night. But without these harsh methods
32
came in.” many code authorities said there could be no com-
pliance because the public was not back of it.34
12The alphabet commissars trol the streets with balloons to frighten star- Roosevelt secured
Roosevelt next signed into law steep income lings away from public buildings, and put another tax in-
tax rate increases on the high brackets and men on the public payroll to chase tum-
introduced a five-percent withholding tax on
crease in 1934. In
bleweeds on windy days.
corporate dividends. He secured another tax fact, tax hikes be-
increase in 1934. In fact, tax hikes became a The CWA, when it was started in the fall of came a favorite
favorite policy of Roosevelt for the next 10 1933, was supposed to be a short-lived jobs policy of Roosevelt
years, culminating in a top income tax rate program: Roosevelt assured Congress in his for the next 10
of 90 percent. Senator Arthur Vandenberg State of the Union message that any new years, culminating
of Michigan, who opposed much of the New such program would be abolished within a
Deal, lambasted Roosevelt’s massive tax in-
in a top income tax
year. “The federal government,” said the
creases. A sound economy would not be re- president, “must and shall quit this business rate of 90 percent.
stored, he said, by following the socialist of relief. I am not willing that the vitality of
notion that America could “lift the lower our people be further stopped by the giving
one-third up” by pulling “the upper two- of cash, of market baskets, of a few bits of
thirds down.”35 Vandenberg also condemned weekly work cutting grass, raking leaves, or
“the congressional surrender to alphabet picking up papers in the public parks.” Harry
commissars who deeply believe the Ameri- Hopkins was put in charge of the agency and
can people need to be regimented by power- later said, “I’ve got four million at work but
ful overlords in order to be saved.”36 Those for God’s sake, don’t ask me what they are
alphabet commissars spent the public’s doing.” The CWA came to an end within a
money like it was so much bilge. few months but was replaced with another
temporary relief program that evolved into
Roosevelt’s Civil Works Administration the Works Progress Administration, or WPA,
(CWA) hired actors to give free shows and by 1935. It is known today as the very gov-
librarians to catalog archives. It even paid ernment program that gave rise to the new
researchers to study the history of the safety term, “boondoggle,” because it “produced” a
pin, hired 100 Washington workers to pa- lot more than the 77,000 bridges and 116,000
buildings to which its advocates loved to
point as evidence of its efficacy.37
With good reason, critics often referred to
the WPA as “We Piddle Around.” In Ken-
tucky, WPA workers catalogued 350 differ-
ent ways to cook spinach. The agency
employed 6,000 “actors” though the nation’s
actors’ union claimed only 4,500 members.
The WPA was used as a political tool to ad-
vance candidates and government causes.
Eugene, Oregon WPA workers lay down their tools in Hundreds of WPA workers were used to col-
1939 on a one-day strike against congressional wage
cuts. Roosevelt’s initial jobs program, begun in 1933,
lect campaign contributions for Democratic
was supposed to be short-lived. However, once Party candidates. In Tennessee, WPA work-
instituted, such programs proved difficult to
abolish: the last WPA project was not eliminated
ers were fired if they refused to donate two
until 1943. percent of their wages to the incumbent gov-
13With good reason, ernor.
critics often re-
In Oregon, the WPA used tax dollars to pub-
ferred to the Works
lish and mail 15,000 copies of administrator
Progress Adminis- Harry Hopkins’ speech that favored the
tration (WPA) as Roosevelt Supreme Court-packing bill intro-
“We Piddle duced in 1937. The Salem Capital Journal
Around.” In Ken- reported, the WPA “is not confining its pro-
tucky, WPA work- paganda methods to its own employes. Prac-
tically every federal officeholder or employe
ers catalogued 350 WPA Camp Wilson No. 1 was for laborers working on
is receiving a copy of Hopkins’ speech with a
different ways to written request from the local WPA admin-
the Wilson River Highway Project in Tillamook
County, Oregon. Many Americans viewed WPA
cook spinach. istrator to wire or write senators and repre- projects as helpful, without considering their high
cost and corruption.
sentatives indorsing the president’s bill and
requesting support for it.” The Capital Jour- largely prevented the jobless from finding
nal decried the attempt to regiment the mil- real jobs in the first place. The stupefying
lions of WPA workers in support of roster of wasteful spending generated by
Roosevelt’s proposal as “a gross misuse of these jobs programs represented a diversion
relief funds.”38 A WPA employee stated that of valuable resources to politically motivated
this “was purely a job of spreading political and economically counterproductive pur-
propaganda…Those who oppose the poses.
president’s proposal to pack the court are
assessed through taxes to help pay for pro- A brief analogy will illustrate this point. If a
moting that proposal. It is unfair and an thief goes house to house robbing everybody
abuse of power that is typical of new deal in the neighborhood, then heads off to a
methods.”39 nearby shopping mall to spend his ill-gotten
loot, it is not assumed that because his spend-
By 1941, only 59 percent of the WPA budget ing “stimulated” the stores at the mall he has
went to paying workers anything at all; the thereby performed a national service or pro-
rest was sucked up in administration and vided a general economic benefit. Likewise,
overhead. The editors of The New Republic when the government hires someone to cata-
asked, “Has [Roosevelt] the moral stature to log the many ways of cooking spinach, his
admit now that the WPA was a hasty and tax-supported paycheck cannot be counted
grandiose political gesture, that it is a as a net increase to the economy because
wretched failure and should be abolished?”40 the wealth used to pay him was simply di-
The answer to that question, unfortunately, verted, not created. Economists today must
was no: The last of the WPA’s projects was still battle this “magical thinking” every time
not eliminated until July of 1943. more government spending is proposed—as
if money comes not from productive citizens,
Roosevelt has been lauded for his “job-cre- but rather from the tooth fairy.
ating” acts such as the CWA and the WPA.
Many people think that they helped relieve “An astonishing rabble of impudent
the Depression. What they fail to realize is nobodies”
that it was the rest of Roosevelt’s tinkering Roosevelt’s haphazard economic interven-
that prolonged the Depression and which tions garnered credit from people who put
14high value on the appearance of being in crashed nearly 50 percent between August The American
charge and “doing something.” The great 1937 and March 1938. The “economic economy was soon
majority of Americans were patient: They stimulus” of Franklin Roosevelt’s New Deal
wanted very much to give this charismatic had achieved a real “first”: a depression
relieved of the bur-
polio victim and former New York governor within a depression! den of some of the
the benefit of the doubt. But Roosevelt al- New Deal’s worst
ways had his critics, and they would grow Phase IV: The Wagner Act excesses when the
more numerous as the years groaned on. One Supreme Court
of them was the inimitable “Sage of Balti- The stage was set for the 1937-38 collapse outlawed the Na-
more,” H. L. Mencken, who rhetorically with the passage of the National Labor Rela-
threw everything but the kitchen sink at the tions Act in 1935—better known as the
tional Recovery
president. Paul Johnson sums up Mencken’s “Wagner Act” and organized labor’s “Magna Administration in
stinging but often-humorous barbs this way: Carta.” To quote Hans Sennholz again: 1935 and the
Agricultural Ad-
Mencken excelled himself in attacking the triumphant This law revolutionized American labor relations. It justment Act in
FDR, whose whiff of fraudulent collectivism filled took labor disputes out of the courts of law and
1936, and threw
him with genuine disgust. He was the ‘Fuhrer,’ the brought them under a newly created Federal agency,
‘Quack,’ surrounded by ‘an astonishing rabble of the National Labor Relations Board, which became
out other, more
impudent nobodies,’ ‘a gang of half-educated peda- prosecutor, judge, and jury, all in one. Labor union minor acts and
gogues, nonconstitutional lawyers, starry-eyed up- sympathizers on the Board further perverted this programs which
lifters and other such sorry wizards.’ His New Deal law, which already afforded legal immunities and hindered recovery.
was a ‘political racket,’ a ‘series of stupendous bogus privileges to labor unions. The U. S. thereby aban-
miracles,’ with its ‘constant appeals to class envy and doned a great achievement of Western civilization,
hatred,’ treating government as ‘a milch-cow with equality under the law.
125 million teats’ and marked by ‘frequent repudia-
tions of categorical pledges.’41 The Wagner Act, or National Labor Relations Act,
Signs of life
The American economy was soon relieved
of the burden of some of the New Deal’s
worst excesses when the Supreme Court
outlawed the NRA in 1935 and the AAA in
1936, earning Roosevelt’s eternal wrath and
derision. Recognizing much of what
Roosevelt did as unconstitutional, the “nine
old men” of the Court also threw out other,
more minor acts and programs which hin-
dered recovery.
Freed from the worst of the New Deal, the
economy showed some signs of life. Unem-
ployment dropped to 18 percent in 1935, 14
The Supreme Court came under attack by President
percent in 1936, and even lower in 1937. But Roosevelt because it declared important parts of the
by 1938, it was back up to 20 percent as the New Deal unconstitutional. FDR’s “court-packing”
scheme contributed to the resumption of economic
economy slumped again. The stock market depression in 1937.
15On the heels of the was passed in reaction to the Supreme Court’s void- come earners responsible for making the
Wagner Act, ance of NRA and its labor codes. It aimed at crush- bulk of the nation’s decisions about private
ing all employer resistance to labor unions. Anything investment.”45
Roosevelt deliv-
an employer might do in self-defense became an
ered a thunderous During a period of barely two months dur-
“unfair labor practice” punishable by the Board. The
barrage of insults ing late 1937, the market for steel—a key
law not only obliged employers to deal and bargain
against business, economic barometer—plummeted from 83
with the unions designated as the employees’ repre-
followed by a rash percent of capacity to 35 percent. When that
sentative; later Board decisions also made it unlaw-
of punitive mea- news emblazoned headlines, Roosevelt took
ful to resist the demands of labor union leaders.42
an ill-timed nine-day fishing trip. The New
sures, including
Armed with these sweeping new powers, la- York Herald-Tribune implored him to get
new strictures on bor unions went on a militant organizing back to work to stem the tide of the renewed
the stock market frenzy. Threats, boycotts, strikes, seizures of Depression. What was needed, said the
and a tax on cor- plants, and widespread violence pushed pro- newspaper’s editors, was a reversal of the
porate retained ductivity down sharply and unemployment Roosevelt policy “of bitterness and hate, of
earnings. up dramatically. Membership in the nation’s setting class against class and punishing all
labor unions soared: by 1941, there were two who disagreed with him.”46
and a half times as many Americans in
unions as had been the case in 1935. Histo- Columnist Walter Lippmann wrote in March
rian William E. Leuchtenburg, himself no 1938 that “with almost no important excep-
friend of free enterprise, observed, “Prop- tion every measure [Roosevelt] has been in-
erty-minded citizens were scared by the sei- terested in for the past five months has
zure of factories, incensed when strikers been on tending to reduce or discourage the
interfered with the mails, vexed by the in- production of wealth.”47
timidation of nonunionists, and alarmed by
flying squadrons of workers who marched, As pointed out earlier in this essay, Herbert
or threatened to march, from city to city.”43 Hoover’s own version of a “New Deal” had
hiked the top marginal income tax rate from
An unfriendly climate for business 24 to 63 percent in 1932. But he was a piker
From the White House on the heels of the compared to his tax-happy successor. Un-
Wagner Act came a thunderous barrage of
insults against business. Businessmen,
Roosevelt fumed, were obstacles on the road
to recovery. He blasted them as “economic
royalists” and said that businessmen as a class
were “stupid.”44 He followed up the insults
with a rash of new punitive measures. New
strictures on the stock market were imposed.
A tax on corporate retained earnings, called
the “undistributed profits tax,” was levied.
“These soak-the-rich efforts,” writes econo-
mist Robert Higgs, “left little doubt that the
president and his administration intended to Special powers granted to organized labor with the
push through Congress everything they passage of the Wagner Act contributed to a wave of
militant strikes and a “depression within a
could to extract wealth from the high-in- depression” in 1937.
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