Lawrence Reed: Great Myths of the Great Depression

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I remember very little from the US history courses I took during my time in public schools. It felt like a relentless flogging of names and dates. I remember covering the major stuff. The Revolutionary War, the Constitutional Convention, the Civil War, the World Wars, and of course, the Great Depression were presented as a mind numbing barrage of details to be dutifully regurgitated in an exam. Beyond my impression that the Smoot-Hawley Tariff was a funny sounding name for a piece of legislation, the most I remember about the Great Depression was that capitalism failed and the government under FDR’s leadership saved the day.  Based on the sentiments expressed by progressives to this day, this impression seems widely shared. 

However, this romantic view doesn’t square with reality.  A great deal of clear eyed research has been conducted to expose the factual record, and Great Myths of the Great Depression is a fantastic primer on the true legacy of the Hoover and Roosevelt administrations. 

Written by Foundation for Economic Education president, Lawrence Reed, the piece is filled with interesting facts and summarizes the best of this research very effectively. Perhaps the most interesting revelation is how the Hoover administration’s economic activism paved the way for of the FDR administration’s highly interventionist policies of the New Deal. Contrary to popular mythology, Hoover was not the hands off, laissez-faire Republican many claim. 

Starting with a highly inflationary monetary policy spurred by the Fed, the 20’s stock market bubble was induced by central bankers. This catastrophe was only compounded by the Fordney-McCumber Tariff of 1922 followed by the infamous Smoot-Hawley Tariff of 1930. These tariffs triggered deep contractions in agriculture and sparked an international trade war. In the wake of a global collapse in commodity and asset prices precipitated by the ’29 market crash, the Fed took a bad situation and made it worse by raising the Fed funds rate and throttling the money supply into a deflationary spiral.  Hoover further compounded the problems by increasing subsidies to businesses and farmers which were doled out through the Reconstruction Finance Corporation and the Federal Farm Board respectively. Just as modern politicians and would-be intellectuals believe that high wage mandates lead to increased purchasing power and higher consumer spending, Hoover’s Department of Commerce bullied businesses into keeping wages high.  This allegedly laissez-faire president threw another wrench into an already sputtering economic engine by passing the Revenue Act of 1932.  Hardly the legacy of a president friendly to free markets. 

Ironically, the candidate who charged the Hoover administration of leading the country to socialism and promised to restore fiscal rectitude by shoring up the gold standard was Franklin Delano Roosevelt. Rather than making good on these promises, FDR escalated every one of Hoover’s policies in ways that prolonged and protracted the misery of the Depression. 

Paving the way for the eventual destruction of sound money, one of FDR’s first major acts as president was to criminalize the ownership of gold through the signing of Executive Order 6102.  When you’ve got a hard money supply and you’ve got designs on an expanded warfare-welfare state, the Fed can inflate the money supply a little more easily if the proles don’t own too much gold. 

FDR’s first big legislative move which had the unfortunate effect of turning business into quasi-fascistic wards of the state was the National Industrial Recovery Act of 1933.  Instead of responding to the natural forces of supply and demand, businesses were forced to comply with a raft of arbitrary mandates imposed from on high. 

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One of the particularly horrific and wasteful mandates of the New Deal was the Agricultural Adjustment Act of 1933; a legislative abomination that seemed more befitting of Stalin than an American president.  Crops were burned, livestock were slaughtered and taxes were levied all in service of eliminating surpluses and increasing the purchasing power of agriculture producers. Despite being initially stricken down as unconstitutional in 1936, the AAA’s destructive consequences weren’t limited to kneecapping the agriculture industry. The seed of the eventual destruction of the gold standard known as the Thomas Amendment was written into the AAA. This amendment paved the way for unlimited credit expansion by the Fed.  FDR would eventually revive the AAA in 1938 and institute a vast array of agriculture price supports, quotas and subsidies through Federal Crop Insurance Corporation and Commodity Credit Corporation. These actions enshrined an era of farm belt crony capitalism and big agribusiness for years to come. 

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By 1935, FDR implemented the Works Progress Administration. This bureaucracy doled out millions to fund domestic infrastructure projects. It also left a seemingly indelible impression of the virtues of federal economic activism in the minds of the public. Though many roads were paved and bridges built, a closer examination of the WPA legacy reveals more than a few arbitrary mandates, squandered resources and crony coffers lined. 

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Things went from bad to worse with the passage of the quasi-Marxist National Labor Relations Act of 1935 aka the Wagner Act.  The Wagner Act took labor grievances out of the courts and into the purview of a new federal bureaucracy, the National Labor Relations Board. Under the cover of legitimacy accorded by the Wagner Act and NRLB, labor unions could threaten and intimidate employers and nonunion workers into compliance and acquiescence.

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As if these actions weren’t damning enough, the origins of the 2008 housing crisis can also be traced to Federal Housing Act of 1934.  The vast complex of government sponsored entities and federal agencies were charged with overseeing home ownership mandates. Instead, they created a set of incentives which provided more than enough legislative helium for a housing bubble when conjoined with an inflationary monetary policy.

The conventional wisdom about the government’s role in alleviating the Great Depression and the private sector’s role in creating it is badly perverted.  Sadly, politicians benefit by peddling promises of prosperity that they can never fulfill.  Each dollar diverted towards a subsidy is a dollar of wealth destroyed which could have been diverted towards private enterprise. Each dollar of subsidy dispensed by a bureaucrat enriches a crony, aggrandizes the bureaucracy and diminishes the sphere of voluntary exchange.  Each minimum wage increase is an increase in production costs and prices low skill labor out of the market.  Each federal agency charged with upholding abstract notions of “public good” creates a license for corruption and moral hazard which only diminishes people’s faith in private enterprise. 

As politicians agitate anew for yet more intervention into an economy to “fix” problems that were legislated into existence with the laws they wrote, the history and legacy of the Great Depression deserves a deeper reexamination.  Mr. Reed’s essay is an essential starting point. 

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