Americans seem wedded to the story of the Great Depression, which began in the wake of the stock market crash of 1929, as a tale of the follies of free market economies. Fortunately newer research is chipping away at these long cherished but mistaken lies.
We can only recall the lyrics of Kodachrome by Paul Simon which derides the fare of secondary education. Unfortunately he should have leveled his remarks at higher education which is a hotbed of deceits about much of the world but especially of the Great Depression whose aforementioned interpretation is a shibboleth of the well educated American.
The standard narrative asserts that greedy Americans and businesses engaged in a torrid orgy of stock market speculation whose bursting wiped out enormous paper wealth. The loss of this ephemeral wealth left the nation poorer while the hapless Hoover sat around doing nothing as Americans struggled for survival.
When Americans heard about Roosevelt’s grand plans and economic bailouts through massive government largesse, they realized that hope was on the way, voting with both feet and hands to elect their savior. After Roosevelt enacted his dramatically novel formulas for recovery, economic revival took root and America could sing Happy Days Are Here Again.
Many contemporary critics and a few subsequent scholars realized that the cherished myth was more a deceit rather than truth. Murray Rothbard understood early the mischievous role of the Federal Reserve Board in causing and extending the depression. In fact Lawrence Reed, in the vanguard of analysts challenging the conventional wisdom over the past 30 years, cites Rothbard’s alternative assessment, though not fully supportive of it. We take issue with Lawrence's disagreement but that is a topic for another post.
Lawrence observes that stock speculation was no more pronounced – perhaps less so – during the 1920s than in previous times, while other economists maintain that it was isolated to a very small minority of stock market players.
The Federal Reserve, whose great justification was that it would end market crashes through enlightened monetary management, committed two acts which would guarantee misery for millions of Americans for the next two decades starting in the mid 1920s when it used its many vaunted tools to massively expand the money supply by 60% during the middle part of the decade.
Then, fearing that it had created too much of a good thing, the Fed abruptly changed course in 1928, after the death of its chairman Benjamin Strong, by sharply raising interest rates and reserve requirements for banks. This sharp tightening of credit cut the supply of money, forcing many stock market investors into margin calls which led to a spiral of sell offs culminating in the great crash of October 1929.
At the time, you could probably count on both hands - with a finger or two left over - the number of Americans who understood the voodoo science of monetarism, the bedrock underlying the policy guidance of the central bank. It is quite likely that many in the Fed did not fully understand what they were doing. But, those in power are infallible, dontcha know? Thus there would be no relief to the nation from the central planners at the New York Fed.
Another common deceit about the Great Depression is that Hoover was a do nothing president. As Lawrence and others show, Hoover launched a frenzy of government spending and interventionist policies and agencies to deal with the crisis. In fact, Roosevelt adviser Rexford Tugwell conceded many years after the Roosevelt presidency that the New Deal was simply an expansion of the Hoover programs. Hoover had spent all of the 1920s strongly advocating government intervention in a time of economic crisis from which we conclude that the depression was a premeditated act.
Hoover, like his successor, broadly and sharply raised taxes on all as a means of financing government programs, vastly enlarging the government’s take of GDP and federal debt. The portion of the federal share rose from 16.1% to 22.5% toward the end of Hoover’s tenure.
In past depressions, most of which ended after 2 years, wages fell to adjust to new economic conditions. But with Hoover’s statist interventions, wages remained stubbornly high – just as they did under Roosevelt’s tutelage, whose union policies entrenched wages at unnaturally high levels.
But this poison was not the worst of Congress’ or Hoover’s potion. The Smoot – Hawley act of 1930 which raised tariffs dramatically cut the markets for American farm products and made many others economically prohibitive.
So the legacy of Hoover was higher taxes, higher government spending, higher wages, and higher tariffs, while at the same time, the Federal Reserve was drastically shrinking the money supply.
Roosevelt campaigned against what his vice president called socialism. In fact, Roosevelt sounded like a very conservative balanced budget limited government candidate. However, in many extraordinary about faces, Roosevelt put Hoover’s policies on steroids.
While many credit Roosevelt for saving the nation, the fact that it spent another 10 years in depression on his watch is far more a damnation of his policies than an endorsement. Roosevelt sent storm troopers into the garment district of New York to arrest men who would sew pants for 5 cents below the federally dictated rate. They carried axes to break down the doors of anyone suspected of violating government policies.
We must digress at this point. Why would the Roosevelt administration, which had inveighed against the excesses of government in its campaign for election, pursue policies identically enforced in the fashion of Adolph Hitler?
For that answer, we must turn to Roosevelt’s former son-in-law Curtis Dall who wrote an autobiography of his famous in-law long after the divorce from the president’s daughter. Dall was also surprised by the abrupt change in Roosevelt, having observed him first hand while governor of New York. Dall’s contention is that Roosevelt was surrounded by miscreant advisors who pursued an agenda of their own rather than of their boss.
This theory explains much and I further develop it to state that these advisors were working directly and indirectly for the very plutocrats who engineered the depression as a means of ushering in martial law. The very brutal enforcement methods of the New Deal share the finger print of the Nazis. But both of these systems of tyranny go back to the plutocrats who financed Mussolini, Hitler, and Lenin. World War 2 was in fact the brainchild of the Wall Street plutocrats against whom Roosevelt frequently inveighed and with good cause.
On the other hand, FDR was not an intellectual giant – a somewhat pompous frat boy – who valued politics above good governance and thus was supple putty in the hands of his manipulators. Indeed such manipulation was assisted not only by Roosevelt’s vanity, but also by his very frail health which enabled his advisors to fill the power vacuum during the president’s many absences and emergency visits to Bethesda Naval Hospital.
Returning to our narrative, FDR’s vast expansion of regulation, diversion of money from productive to non-productive pursuits, and confiscatory tax policies crippled the country for years to come. The Fed continued to tighten money, a combination which sent the economy into a relapse in 1938.
It is inconceivable that men could slaughter millions of animals, as Henry Wallace ordered, when millions of people were hungry and starving. The callous disregard of suffering which that administration evinced toward the citizenry was on a par with that of Stalin and additional support for our contention that powers outside the administration were wielding a strong hand.
FDR’s treasury secretary Henry Morganthau stated candidly in his diary that after all of the billions spent on solving the economic problems that unemployment was as high as when the New Deal started – essentially an utter failure.
In Roosevelt’s defense, there was indeed enormous corruption on Wall Street which desperately called for prosecution, a task which his administration and Congress pursued with some success. It is also true that industrialists in many instances were brutal animals in need of restraint. So while the Wagner act and other labor friendly legislation hindered economic activity, corrections of the excess of capitalists were long overdue. But this is far from an indictment of free enterprise – simply a call for supervision of irresponsible and inhuman management much as the Glass Steagal Act limited the excesses of Wall Street.
Lawrence presents a persuasive case that the Hoover-Roosevelt administrations were much more alike than different with both men advocates of strong statist interventions in the case of economic crisis. We also see that both the Fed and both administrations contributed in equal parts to the Depression as they and Congress fiddled while Rome burned.
Reference Lawrence Reed, Great Myths of the Great Depression, http://www.scribd.com/doc/108111838/Great-Myths-2011-Final-Web
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