Yes, FDR Made Depression Worse and Longer

As the federal government seizes control of much more of the U.S. economy — and prepares to do so at an accelerated pace, argues David Brooks of the New York Times — it is useful to examine our greatest economic crisis, the Great Depression. Was it caused by a “failure of free markets” or by a failure of federal controls? Was it solved, or worsened, by new government interventions?

I’ve entered this debate in a small way through the Rocky Mountain News. After reviewing the debate there, I’ll turn to the material in the books that have persuaded me that the Great Depression was caused, worsened, and lengthened by the federal controls particularly of the Hoover and Roosevelt administrations.

In an October 2 editorial, the writers argue that, in her debate, Sarah Palin “let Biden largely escape with his (and Obama’s) tedious riff that the current implosion on Wall Street is largely a result of Republican deregulation — when Democrats were by and large the strongest defenders of Fannie Mae and Freddie Mac’s trip into the wild side of lending.”

I left the following comment:

I am pleased that the Rocky recognizes the true cause of the financial crisis: foolish federal controls that encouraged and forced risky lending. For more details about this, please see Yaron Brook’s article for Forbes:

Unfortunately, the Rocky, in advocating the bailout, doesn’t carry its insight far enough. If federal controls got us into this mess, why should we count on them to get us out? What we need is for government to do its job of protecting rights of property and contract, and otherwise leaving us alone. The bailout is the opposite of that approach.

The Rocky seems to be concerned that, absent some magnificent expenditure of tax dollars (via deficits), the market will not correct quickly enough. I don’t know how long it will take the market to correct. But it’s clear that more federal intervention will only delay that correction and cause more distortion.

The Rocky might be comforted to realize that the Great Depression was primarily worsened and extended by the misguided policies of Hoover and FDR. We need not repeat those mistakes.

Johan Goldberg just came out with an article summarizing Hoover’s idiotic controls:

For more, see the books of Andrew Bernstein and Thomas DiLorenzo on the history of capitalism. I also just received a copy of FDR’s Folly, which I expect to be good.

Somebody called “paperboy” suggested that I’m out of my mind, that I am guilty of “rationalizations and denials of objective reality,” and that I’m a “neocon free-market-dolt” (despite the facts that I’m not a conservative of any stripe and the neoconservatives are enemies of free markets). Notice that “paperboy” does not make a single argument or invoke a single grain of evidence to advance his case: he merely relies on ad hominem attack.

On October 1, Vincent Carroll (who is the editorial page editor at the Rocky) blasted Mark Udall’s reasons for opposing the bailout. I figured that, for Udall to vote against the bailout at all, being mired in his left-wing politics, he deserved some praise, even if Udall hardly gets his economic story straight.

Despite his occasional sympathy for economic liberty, Carroll clearly was frightened into supporting the bailout:

Steven Pearlstein, the Pulitzer Prize-winning business columnist at The Washington Post… began warning a long time ago about the perilous state of the subprime markets – even saying last year that the credit squeeze was “a financial, economic and political time bomb.”

Pearlstein has spent the past couple of weeks futilely trying to persuade the public to rise above its justifiable anger over the financial crisis in order to recognize the stakes involved for the majority of us who were neither reckless lenders or reckless borrowers.

“Now let me tell you something very simple and very important,” he wrote last week. “You can try to prevent a financial meltdown or you can teach Wall Street a lesson, but you can’t do both at the same time.

“So which will it be?”

But that line of argument fails; even if some people opposed the bailout to “teach Wall Street a lesson,” that was not the real reason to oppose it.

Carroll took on the free-market economists who opposed the bailout:

Yes, there are principled reasons for opposing the credit-market bailout – although they are more often articulated by the libertarian right than the progressive left. Libertarians understandably fear a greater permanent role for government in micromanaging financial markets if the bailout deal goes through; they also typically dismiss fears of economic collapse reminiscent of 1873 or 1929 as “ridiculous scaremongering,” to quote one of them. But how can they be so sure? Which celestial authority revealed to them that this country will never have another serious depression?

Carroll’s case is pretty weak. The economists I’ve read, such as Jeffrey Miron, rely on economic data and theory, not a “celestial authority.” (Also check out Russell Roberts’s critique of the bailout.) Meanwhile, why does Carroll think the bailout will do any good? Has he elevated Henry Paulson to the level of a celestial authority?

I dashed off a quick letter that the Rocky published on October 13:

At least the Rocky’s Vincent Carroll recognizes that many offer good reasons to oppose the bailout (“Playing to the crowd,” On Point, Oct. 1), but he is too quick to liken the modern situation to the period before the Great Depression.

The Depression was set off by the federal controls of the Hoover administration, but “FDR’s economic policies made the Great Depression much worse” and “caused it to last much longer than it otherwise would have,” economist Thomas DiLorenzo writes in his history of American capitalism. We have more to fear from new, misguided federal controls than we do from the existing crisis.

I am grateful to Mark Udall for listening to his constituents and voting against the bailout. Meanwhile, Carroll relies more on authority than argument to make his case for the bailout.

“Anderson” comments:

Another ideological claim that the depression (or any other adverse economic doing) is/was a result of government intervention. What a simple explanation!

Let’s not kid ourselves, the current crisis arose largely out of speculative greed, and I’m sure the same had something to do with the great depression as well.

“Anderson’s” claim is obviously the product of leftist ideology, for which he has absolutely no backing. He just assumes that “speculative greed,” rather than federal controls, caused the Great Depression.

So now is the time for some facts. I’ll be relying mostly on three books: FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression, by historian Jim Powell; How Capitalism Saved America, by economist Thomas DiLorenzo; and The Capitalist Manifesto, by philosopher Andrew Bernstein. (I know some will be tempted to dismiss my sources out of hand because their authors adhere to different political philosophies, but I encourage readers to look at the underlying facts presented by the works.)

First some basic timelines (in case Joe Biden is reading). Calvin Coolidge served in the office of the presidency from August 1923 to March 1929. Herbert Hoover then served till March 1933. Franklin Delano Roosevelt served till April 1945. The Dow Jones Industrial Average peaked at 381 on September 3, 1929. Black Tuesday was October 29, 1929. By November 13, the Dow had fallen to 199. By July 8, 1932, it had fallen to 41.

There is some debate over the effects of pre-Hoover policies. Powell argues that Benjamin Strong, governor of the Federal Reserve Bank of New York, propped up the stock market by cutting the discount rate, buying British pounds with gold (making “bonds less attractive investments than stocks”), and prodding the “Federal Reserve Open Market Investment Committee to buy $200 million worth of government securities from banks, injecting that much cash into the banking system” (pages 28-29). Regardless of how one judges the effects of such measures, obviously America’s investment system was hardly free market even then. Powell’s account meshes with the general Austrian account, in which inflationary policies create a bubble destined to pop. DiLorenzo quotes Murray Rothbard, who claimed that from 1921 to 1929 “the money supply increased by $28.0 billion, a 61.8 percent increase…” (177) On the other side, Bernstein argues, following Richard Salsman, that the “prosperity of the 1920s was genuine, not a chimera built on air” (377). My sense is that both accounts are right; most of the gains of the ’20s reflected real growth of productivity, but nevertheless pre-Hoover policies artificially inflated the stock market.

Beyond the point of how much inflationary policy contributed to the subsequent bust, the accounts are pretty much the same. Powell notes that by October 1928 the discount rate had been raised to 6 percent, in an intentional effort to quell the stock market’s growth (it worked). This lead to “steady deflationary pressure on the economy,” Powell quotes Milton Friedman (29).

DiLorenzo emphasizes that, even before he became president, Hoover was a “hyperinterventionist” as Secretary of Commerce (160). Importantly, before and during his presedency, Hoover worked tirelessly to artificially inflate monetary (as opposed to real) wages (163-64). This proved particularly disastrous as deflation overtook the nation.

Bernstein emphasizes that the Smoot-Hawley tariff, considered by all to be a contributer to the depth of the Great Depression, actually helped set it off. Hoover was promoting tariff protectionism by the summer of 1929, Bernstein notes. “On October 21st, an amendment to limit tariffs to agricultural products was defeated in the Senate. On October 24th, the stock market suffered its first one-day crash. On October 29th, amid rumors that Hoover would not veto the Smoot-Hawley Bill, stock prices crashed even further,” Bernstein writes. Why was this significant? “Over the next three years (1930-1933), U.S. exports plunged 64% and farm exports by 60%” (378).

FDR continued Hoover’s interventionist policies and dramatically expanded them, raising taxes and imposing crushing controls. Bernstein summarizes:

The interventionist schemes of the Roosevelt administration were an unmitigated economic disaster. Suffice it to say that by 1937, after more than four years of Roosevelt’s policies (and after eight years of the combined Hoover-Roosevelt New Deal) — after the National Industrial Recovery Act, the abandonment of the gold standard, the tripling of taxes, more labor legislation and many similar acts of governmental interference — unemployement rose to more than ten million, and business activity fell to virtually the same low reached in 1932. (382)

DiLorenzo reinforces the point with a series of charts (pages 180-83). The first pertains to the unemployment rate, and it is reproduced below (the year precedes the percent unemployed):

1929: 3.2
1930: 8.7
1931: 15.9
1932: 23.6
1933: 24.9
1934: 21.7
1935: 20.1
1936: 16.9
1937: 14.3
1938: 19.0
1939: 17.2
1940: 14.6

If FDR was the nation’s economic savior, then what explains the general lack of recovery, including the “Rosevelt recession” of 1938 with an unemployment rate of 19 percent?

The claim that FDR “saved us” from the Great Depression is simple ignorance or outright deception. Roosevelt inherited the economic problems largely created by Hoover and made them much worse.

The historical case is of obvious relevance to us today. Ominously, the Associated Press has described the federal government’s “decision to buy shares in the nation’s leading banks” as “a kind of federal intervention not seen since the Depression era.”

If David Brooks is right, and I fear he is, the Bush-Obama administrations could give us something uncomfortably close to what the Hoover-Roosevelt administrations once gave the nation. You gotta love bipartisanship.

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