Politicians Caused and Worsened the Great Depression

The following article originally was published December 8, 2008, by Grand Junction’s Free Press. Links have been added here.

Politicians caused and worsened the Great Depression

by Linn and Ari Armstrong

Do we really want a new New Deal? The answer depends on whether we think Roosevelt’s New Deal made things better or worse during the Great Depression.

The Progressives count FDR a national savior and see Barack Obama as the Second Coming. Yet, while the term “progressive” evokes concern for the poor and community spirit, it names the politics of taking people’s wealth by force and controlling their lives.

Progressive sophistry extends to the New Deal. For example, in a column for the New York Times, Paul Krugman writes, “Now, there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.”

Beyond the fact that left-wing academics and newspaper columnists hardly prove more reliable, a large body of scholarly work shows the destructiveness of the New Deal and earlier policies.

Historians Paul Johnson and Jim Powell take a dim view of FDR, as does Amity Shlaes in her book The Forgotten Man. Shlaes is an economist at the Council on Foreign Relations. In a recent column, George Will cites other scholars critical of the policies of FDR and Hoover. Economists Richard Vedder and Lowell Gallaway criticize FDR in their book Out of Work. This book was published through the Independent Institute of California, but Krugman might address its arguments rather than smear its authors.

So let us look at some of the relevant facts in the space available. While natural disasters can disrupt the economy, in large, prosperous economies such as ours the most powerful threat to economic health comes from ill-informed and special-interest-serving politicians. Economists who follow von Mises point out that inflationary spending skews the flow of capital, leading to painful readjustment.

Monetary politics played an important role in causing the Great Depression. Especially since the Federal Reserve Act of 1913, the federal government has largely controlled the banks. In 1927, Benjamin Strong, governor of the Federal Reserve Bank of New York, cut his bank’s lending rate to provide what he deemed a shot of whiskey to the stock market. Then, in 1928 and 1929, the Federal Reserve sharply increased rates, sucking the wind out of the economy.

The Federal Reserve also contributed to the easy lending behind the modern mortgage crisis. The government, intent on preventing a deflationary spiral, is keeping lending rates low and spending trillions in new money. However, not only does this prevent healthy economic adjustments, it leads to harmful inflation. Central planners have a hard time maintaining a steady money supply.

The Smoot-Hawley Tariff Act that Hoover signed in 1930 devastated international trade. However, Hoover supported the tariff in 1929 before the crash. Amity Shlaes cites a telegram from a General Motors executive: “Passage bill would spell economic isolation United States and most severe depression ever experienced.”

Thankfully, today few seem interested in imposing that sort of protectionism. However, Obama wants to restrict trade under the protectionist covers of “strong labor standards and strong environmental standards.”

The policies of Hoover and FDR devastated the labor market. Now the unemployment rate in Colorado approaches 6 percent. In 1933 it was 25 percent nationally. After falling, it spiked up to 19 percent by 1938, long after FDR took office in 1933.

The left claims the problem is that FDR didn’t spend enough of other people’s money in his massive welfare and make-work schemes. But the reality is that Hoover and FDR caused the high unemployment through a series of policies and laws that kept the monetary wages of some artificially high. These wage controls worked in concert with the deflationary monetary policies of the late ’20s and mid ’30s to keep a huge portion of the population out of work. It is of little consolation that FDR “brought real relief” to those he first helped deprive of employment.

Today the auto industry wants taxpayers to foot the bill for its failure. Notably, this industry remains strangled by the union favoritism started by Hoover and perfected by FDR.

When politicians “stimulate” the economy, they do so by distributing wealth from some to others. So when Obama or Governor Ritter claim to “create” jobs in the “new energy economy” or other sector, remember that they’re destroying other jobs and replacing them with politically-correct ones. The proper remedy for government-induced unemployment is not more corporate and personal welfare, but rather a repeal of the policies that damaged the employment market.

Politicians caused the modern mortgage crisis through easy-lending policies (see our November 10 article), and they caused they Great Depression through a series of central controls (only some of which we’ve reviewed here). Will Americans keep getting suckered by political “solutions” to the economic problems caused by politicians? Or will we finally demand economic liberty?