Great Myths of the Great Depression

Many volumes have been written about the Great Depression and its impact on the lives of millions of Americans. Historians, economists, and politicians have all combed the wreckage searching for the "black box" that will reveal the cause of this legendary tragedy. Sadly, all too many of them decide to abandon their search, finding it easier perhaps to circulate a host of false and harmful conclusions about the events of seven decades ago.

How bad was the Great Depression? Over the four years from 1929 to 1933, production at the nation?s factories, mines, and utilities fell by more than half. People?s real disposable incomes dropped 28 percent. Stock prices collapsed to one-tenth of their precrash height. The number of unemployed Americans rose from 1.6 million in 1929 to 12.8 million in 1933. One of every four workers was out of a job at the Depression?s nadir, and ugly rumors of revolt simmered for the first time since the Civil War.

Old myths never die; they just keep showing up in college economics and political science textbooks. Students today are frequently taught that unfettered free enterprise collapsed of its own weight in 1929, paving the way for a decade-long economic depression full of hardship and misery. President Herbert Hoover is presented as an advocate of "hands-off", or laissez-faire, economic policy, while his successor, Franklin Roosevelt, is the economic savior whose policies brought us recovery. This popular account of the Depression belongs in a book of fairy tales and not in a serious discussion of economic history, as a review of the facts demonstrates.

To properly understand the events of the time, it is appropriate to view the Great Depression as not one, but four consecutive depressions rolled into one. Professor Hans Sennholz has labeled these four "phases" as follows: the business cycle; the disintegration of the world economy; the New Deal; and the Wagner Act.[1]

The first phase explains why the crash of 1929 happened in the first place; the other three show how government intervention kept the economy in a stupor for over a decade.

The Great Depression was not the country's first depression, though it proved to be the longest. The common thread woven through the several earlier debacles was disastrous manipulation of the money supply by government. For various reasons, government policies were adopted that ballooned the quantity of money and credit A boom resulted, followed later by a painful day of reckoning. None of America?s depressions prior to 1929, however, lasted more than four years and most of them were over in two. The Great Depression lasted for a dozen years because the government compounded its monetary errors with a series of harmful interventions.

Most monetary economists, particularly those of the "Austrian school", have observed the close relationship between money supply and economic activity. When government inflates the money and credit supply, interest rates at first fall. Businesses invest this "easy money" in new production projects and a boom takes place in capital goods. As the boom matures, business costs rise, interest rates readjust upward, and profits are squeezed. The easy-money effects thus wear off and the monetary authorities, fearing price inflation, slow the growth of or even contract the money supply. In either case, the manipulation is enough to knock out the shaky supports from underneath the economic house of cards.

One of the most thorough and meticulously documented accounts of the Fed?s inflationary actions prior to 1929 is America?s Great Depression by the late Murray Rothbard. Using a broad measure that includes currency, demand and time deposits, and other ingredients, Rothbard estimated that the Federal Reserve expanded the money supply by more than 60 percent from mid-1921 to mid-1929.[2] The flood of easy money drove interest rates down, pushed the stock market to dizzy heights, and gave birth to the "Roaring Twenties".

By early 1929, the Federal Reserve was taking the punch away from the party. It choked off the money supply, raised interest rates, and for the next three years presided over a money supply that shrank by 30 percent. This deflation following the inflation wrenched the economy from tremendous boom to colossal bust.

The "smart" money ?the Bernard Baruchs and the Joseph Kennedys who watched things like money supply? saw that the party was coming to an end before most other Americans did. Baruch actually began selling stocks and buying bonds and gold as early as 1928; Kennedy did likewise, commenting, "only a fool holds out for the top dollar".[3]

When the masses of investors eventually sensed the change in Fed policy, the stampede was underway. The stock market, after nearly two months of moderate decline, plunged on "Black Thursday" ?october 24, 1929? as the pessimistic view of large and knowledgeable investors spread.

The stock market crash was only a symptom ?not the cause? of the Great Depression: the market rose and fell in near synchronization with what the Fed was doing.

If this crash had been like previous ones, the subsequent hard times might have ended in a year or two. But unprecedented political bungling instead prolonged the misery for twelve long years.

Unemployment in 1930 averaged a mildly recessionary 8.9 percent, up from 3.2 percent in 1929. It shot up rapidly until peaking out at more than 25 percent in 1933. Until March 1933, these were the years of President Herbert Hoover-the man that anti-capitalists depict as a champion of noninterventionist, laissez-faire economics.

Did Hoover really subscribe to a "hands off the economy", free-market philosophy? His opponent in the 1932 elections, Franklin Roosevelt, didn?t think so. During the campaign, Roosevelt blasted Hoover for spending and taxing too much, boosting the national debt, choking off trade, and putting millions of people on the dole. He accused the president of "reckless and extravagant" spending, of thinking "that we ought to center control of everything in Washington as rapidly as possible", and of presiding over "the greatest spending administration in peacetime in all of history". Roosevelt?s running mate, John Nance Garner, charged that Hoover was "leading the country down the path of socialism".[4] Contrary to the modern myth about Hoover, Roosevelt and Garner were absolutely right.

The crowning folly of the Hoover administration was the Smoot-Hawley Tariff, passed in june 1930. It came on top of the Fordney-McCumber Tariff of 1922, which had already put American agriculture in a tailspin during the preceding decade. The most protectionist legislation in U.S. history, Smoot-Hawley virtually closed the borders to foreign goods and ignited a vicious international trade war. Professor Barry Poulson notes that not only were 887 tariffs sharply increased, but the act broadened the list of dutiable commodities to 3,218 items as well.[5]

Officials in the administration and in Congress believed that raising trade barriers would force Americans to buy more goods made at home, which would solve the nagging unemployment problem. They ignored an important principle of international commerce: trade is ultimately a two-way street; if foreigners cannot sell their goods here, then they cannot earn the dollars they need to buy here.

Foreign companies and their workers were flattened by Smoot-Hawley?s steep tariff rates, and foreign governments soon retaliated with trade barriers of their own. With their ability to sell in the American market severely hampered, they curtailed their purchases of American goods. American agriculture was particularly hard hit. With a stroke of the presidential pen, farmers in this country lost nearly a third of their markets. Farm prices plummeted and tens of thousands of farmers went bankrupt. With the collapse of agriculture, rural banks failed in record numbers, dragging down hundreds of thousands of their customers.

Hoover dramatically increased government spending for subsidy and relief schemes. In the space of one year alone, from 1930 to 1931, the federal government's share of GNP increased by about one-third.

Hoover's agricultural bureaucracy doled out hundreds of millions of dollars to wheat and cotton farmers even as the new tariffs wiped out their markets. His Reconstruction Finance Corporation ladled out billions more in business subsidies. Commenting decades later on Hoover's administration, Rexford Guy Tugwell, one of the architects of Franklin Roosevelt?s policies of the 1930s, explained, "We didn?t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started".[6]

To compound the folly of high tariffs and huge subsidies, Congress then passed and Hoover signed the Revenue Act of 1932. It doubled the income tax for most Americans; the top bracket more than doubled, going from 24 percent to 63 percent. Exemptions were lowered; the earned income credit was abolished; corporate and estate taxes were raised; new gift, gasoline, and auto taxes were imposed; and postal rates were sharply hiked.

Can any serious scholar observe the Hoover administration?s massive economic intervention and, with a straight face, pronounce the inevitably deleterious effects as the fault of free markets?

Franklin Delano Roosevelt won the 1932 presidential election in a landslide, collecting 472 electoral votes to just 59 for the incumbent Herbert Hoover. The platform of the Democratic Party whose ticket Roosevelt headed declared, "We believe that a party platform is a covenant with the people to be faithfully kept by the party entrusted with power". It called for a 25 percent reduction in federal spending, a balanced federal budget, a sound gold currency "to be preserved at all hazards", the removal of government from areas that belonged more appropriately to private enterprise, and an end to the "extravagance" of Hoover?s farm programs. This is what candidate Roosevelt promised, but it bears no resemblance to what President Roosevelt actually delivered.

In the first year of the New Deal, Roosevelt proposed spending $10 billion while revenues were only $3 billion. Between 1933 and 1936, government expenditures rose by more than 83 percent. Federal debt skyrocketed by 73 percent.

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 destruction of valuable crops and cattle. Federal agents oversaw the ugly spectacle of perfectly good fields of cotton, wheat, and corn being plowed under. Healthy cattle, sheep, and pigs by the millions were slaughtered and buried in mass graves.

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.

Perhaps the most radical aspect of the New Deal was the National Industrial Recovery Act (NIRA), passed in June 1933, which set up the National Recovery Administration (NRA). Under the NIRA, most manufacturing industries were suddenly forced into government-mandated cartels. Codes that regulated prices and terms of sale briefly transformed much of the American economy into a fascist-style arrangement, while the NRA was financed by new taxes on the very industries it controlled. Some economists have estimated that the NRA boosted the cost of doing business by an average of 40 percent?not something a depressed economy needed for recovery.

Like Hoover before him, Roosevelt signed into law steep income tax rate increases for the high brackets and introduced a 5 percent withholding tax on corporate dividends. In fact, tax hikes became a favorite policy of the president?s for the next ten years, culminating in a top income tax rate of 94 percent during the last year of World War II. His alphabet agency commissars spent the public's tax money like it was so much bilge.

For example, Roosevelt?s public relief programs hired actors to give free shows and librarians to catalogue archives. The New Deal even paid researchers to study the history of the safety pin, hired 100 Washington workers to patrol the streets with balloons to frighten starlings away from public buildings, and put men on the public payroll to chase tumbleweeds on windy days.

Roosevelt created the Civil Works Administration in November 1933 and ended it in March 1934, though the unfinished projects were transferred to the Federal Emergency Relief Administration. Roosevelt had assured Congress in his State of the Union message that any new such program would be abolished within a year. "The federal government", said the President, "must and shall quit this business of relief. I am not willing that the vitality of our people be further stopped by the giving of cash, of market baskets, of a few bits of weekly work cutting grass, raking leaves, or picking up papers in the public parks".

But in 1935 the Works Progress Administration came along. It is known today as the very government program that gave rise to the new term, "boondoggle" because it "produced" a lot more than the 77,000 bridges and 116,000 buildings to which its advocates loved to point as evidence of its efficacy.[7] The stupefying roster of wasteful spending generated by these jobs programs represented a diversion of valuable resources to politically motivated and economically counterproductive purposes

The American economy was soon relieved of the burden of some of the New Deal?s 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 hindered recovery.

Freed from the worst of the New Deal, the economy showed some signs of life. Unemployment dropped to 18 percent in 1935, 14 percent in 1936, and even lower in 1937. But by 1938, it was back up to 20 percent as the economy slumped again. The stock market crashed nearly 50 percent between August 1937 and March 1938. The "economic stimulus" of Franklin Roosevelt?s New Deal had achieved a real "first": a depression within a depression!

The stage was set for the 1937-38 collapse with the passage of the National Labor Relations Act in 1935?better known as the Wagner Act and organized labor's "Magna Carta". To quote Hans Sennholz again:

This law revolutionized American labor relations. It took labor disputes out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board further perverted this law, which already afforded legal immunities and privileges to labor unions. The U.S. thereby abandoned a great achievement of Western civilization, equality under the law.[8]

Armed with these sweeping new powers, labor unions went on a militant organizing frenzy. Threats, boycotts, strikes, seizures of plants, and widespread violence pushed productivity down sharply and unemployment up dramatically. Membership in the nation's labor unions soared; by 1941 there were two and a half times as many Americans in unions as in 1935.

From the White House on the heels of the Wagner Act came a thunderous barrage of insults against business. Businessmen, Roosevelt fumed, were obstacles on the road to recovery. 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 economist Robert Higgs, "left little doubt that the president and his administration intended to push through Congress everything they could to extract wealth from the high-income earners responsible for making the bulk of the nation?s decisions about private investment".[9]

Higgs draws a close connection between the level of private investment and the course of the American economy in the 1930s. The relentless assaults of the Roosevelt administration ?in both word and deed? against business, property, and free enterprise guaranteed that the capital needed to jumpstart the economy was either taxed away or forced into hiding. When Roosevelt took America to war in 1941, he eased up on his antibusiness agenda, but a great deal of the nation's capital was diverted into the war effort instead of into plant expansion or consumer goods. Not until both Roosevelt and the war were gone did investors feel confident enough to "set in motion the postwar investment boom that powered the economy?s return to sustained prosperity".[10]

On the eve of America?s entry into World War II and twelve years after the stock market crash of Black Thursday, ten million Americans were jobless. Roosevelt had pledged in 1932 to end the crisis, but it persisted two presidential terms and countless interventions later.

Along with the horror of World War II came a revival of trade with American?s allies. The war?s destruction of people and resources did not help the U.S. economy, but this renewed trade did. More important, the Truman administration that followed Roosevelt was decidedly less eager to berate and bludgeon private investors, and as a result, those investors came back into the economy to fuel a powerful postwar boom.

The genesis of the Great Depression lay in the inflationary monetary policies of the U.S. government in the 1920s. It was prolonged and exacerbated by a litany of political missteps: trade-crushing tariffs, incentive ?sapping taxes, mind? numbing controls on production and competition, senseless destruction of crops and cattle, and coercive labor laws, to recount just a few. It was not the free market that produced twelve years of agony; rather, it was political bungling on a scale as grand as there ever was.

You mean societies which embody some fantastical libertarian utopia? Of course not, since they cannot exist in the real world.

I don't recall saying anything about libertarianism. Just free market capitalism.

Pakistan is the only country I can think of that relies almost solely on private education. And look what its done them.

It seemed to work pretty well for most of the Founders of this nation.

I'm all for lower taxes. If you don't want to have to pay a mortgage, don't borrow money. If you have to borrow money to buy a house, don't buy a house.

I didn't. In fact, I've large bets against the housing market. If you can articulate why banks should have multiplier ratios, you should be able to understand why real estate is such a dangerous investment.

But still America is a long ways off from socialist oppression. If you believe otherwise, you haven't seen nearly enough of the world to know what you're talking about.

I travel extensively. Thanks to American socialism, you can buy a tetanus shot in Mongolia but not in Montana. The Chinese, who would revolt if taxed at American levels, perform routine acts of tax evasion that would imprison an American for life. Nicaraguans can purchase Cipro as a hedge against an anthrax attack but not John Q. Public. You can spank you child in Moscow..You can advertise hedge funds in Curaco..and so on....

Well then, move to Red China.

I will live where I damn well please, thank you very much.

I can. Its called cheap labor.

Funny how that happens in low tax environments that haven't regulated themselves out of business.

How do you explain western europe, and especially Germany which had a booming economy, great technological advances, lots of women working, with no unemployment(actually a labor shortage) by the mid-1930's, while america was still wallowing in a depression until 1940?

How do I explain short term economic results of Nazism? I believe it was a combination of Fascism with Keynesian economics. This will work, for a little while. Then reality sets in. Frankly, I see fascism as the natural conclusion of socialism. I expect England and France will be fascist in my lifetime.

From http://www.historylearningsite.co.uk/nazis_and_the_german_economy.htm

Germany?s economy was in a mess when Hitler was elected Chancellor in January 1933. Hitler and Nazi propaganda had played on the population?s fear of no hope. Unemployment peaked at 6 million during the final days of the Weimar Republic ? near enough 50% of the nation?s working population. Now Hitler decreed that all should work in Nazi Germany and he constantly played on the economic miracle Nazi Germany achieved.

This "economic miracle" was based on unemployment all but disappearing by 1939.

Unemployment in Germany

Total January 1933 6 million

January 1934 3.3 million

January 1935 2.9 million

January 1936 2.5 million

January 1937 1.8 million

January 1938 1.0 million

January 1939 302,000

But was this true or did the Nazi propaganda machine move into overdrive to persuade the nation and Europe that she had achieved something that other European nations had not during the time of economic depression?

A number of policies were introduced which caused the unemployment figures to drop.

Women were no longer included in the statistics so any women who remained out of work under the Nazi?s rule did not exist as far as the statistics were concerned.

The unemployed were given a very simple choice: do whatever work is given to you by the government or be classed as "work-shy" and put in a concentration camp.

Jews lost their citizenship in 1935 and as a result were not included in unemployment figures even though many lost their employment at the start of Hitler?s time in power.

Many young men were taken off of the unemployment figure when conscription was brought in (1935) and men had to do their time in the army etc. By 1939, the army was 1.4 million strong. To equip these men with weapons etc., factories were built and this took even more off of the unemployment figure.

With these measures in place the unemployment figure had to fall drastically and many saw the Nazi figures as nothing more than a book-keeping trick. However, many would have been too scared to speak out against the Nazis or pass negative comments on the published figures - such was the fear of the Gestapo.

However, there is no doubt that work was created. The Nazis introduced public work schemes for men who worked in the National Labour Service (Reichsarbeitsdienst or RAD). Their work would have included digging ditches on farms to assist irrigation, building the new autobahns, planting new forests etc. The men of the RAD wore a military style uniform, lived in camps near to where they were working and received only what we would term pocket money. However, compared to the lack of success of the Weimar government and the chronic misery of 1931 to 1932, these men felt that at least the Nazi government was making the effort to improve their lot.

To ?protect? those in work, the German Labour Front was set up. This was lead by Robert Ley. The GLF took the role of trade unions which had been banned. To an extent, the GLF did this. Ley ordered that workers could not be sacked on the spot but he also ordered that a worker could not leave his job without the government?s permission. Only government labour exchanges could arrange for a new job if someone did leave his employment.

However, the GLF increased the number of hours worked from 60 to 72 per week (including overtime) by 1939. Strikes were outlawed. The average factory worker was earning 10 times more than those on dole money and few complained ? though to do so was fraught with potential difficulties.

The leisure time of the workers was also taken care of. An organisation called "Kraft durch Freude" (KdF) took care of this. Ley and the KdF worked out that each worker had 3,740 hours per year free for pursuing leisure activities - which the state would provide. The activities provided by the state were carefully and systematically recorded. For the Berlin area (1933-38) :

Type of Event Number of events Number of people involved Theatre performances 21,146 11,507,432 Concerts 989 705,623 Hikes 5,896 126,292 Sports Events 388 1,432,596 Cultural events 20,527 10,518,282 Holidays and cruises 1,196 702,491 Museum tours 61,503 2,567,596 Exhibitions 93 2,435,975 Week-end trips 3,499 1,007,242 Courses/Lectures at the German Adult Education Office 19,060 1,009,922

Cheap holidays and the offer of them was a good way to win the support of the average person in the street. A cruise to the Canary Islands cost 62 marks - easily affordable to many though most cruises were taken up by Nazi Party officials. Walking and skiing holidays in the Bavarian Alps cost 28 marks. A two-week tour of Italy cost 155 marks.

The KdF also involved itself in introducing a scheme whereby the workers could get a car. The Volkswagen - People's Car - was designed so that most could afford it. The Beetle, designed by Ferdinand Porsche, cost 990 marks. This was about 35 weeks wages for the average worker. To pay for one, workers went on a hire purchase scheme. They paid 5 marks a week into an account.

Theoretically, when the account had reached 750 marks the worker would be given an order number which would lead to them receiving a car. In fact, no-one received a car. The millions of marks invested into the scheme were re-directed into the rapidly expanding weapons factories. This accelerated as World War Two approached. No-one complained as to do so could lead to serious trouble with the secret police.

Did the Nazis produce an economic miracle for Germany?

The Minister of the Economy was Hjalmar Schacht. He introduced his "New Plan". This plan intended to reduce imports, reduce unemployment, channel government spending into a wide range of industries and make trade agreements with other nations. Hermann Goering also wanted Germany to become self-sufficient in all industries so that as a nation she could survive a war. Were these plans successful ?

by 1939, Germany still imported 33% of its required raw materials

government income had been 10 billion Reichsmarks in 1928. In 1939, it stood at 15 billion. However, government spending had increased from 12 billion Reichsmarks in 1928 to over 30 billion in 1939 - a difference of 15 billion Reichsmarks. From 1933 to 1939, the Nazi government always spent more than it earned so that by 1939, government debt stood at over 40 billion Resichsmarks.

balance of trade figures had gone into the red by 1939 by 0.1 billion Reichsmarks.

unemployment had fallen from 6 million in 1933 to 300,000 by 1939 and industrial production in 1939 was above the figure for Weimar Germany before the 1929 Wall Street Crash.

annual food consumption in 1937 had fallen for wheat bread, meat, bacon, milk, eggs, fish vegetables, sugar, tropical fruit and beer compared to the 1927 figures. The only increase was in rye bread, cheese and potatoes.

real earnings in 1938 were all but the same as the 1928 figure. Real earnings are wages adjusted to allow for inflation.

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