Who made the great depression?



An explanation

Generally speaking the great depression is presented as either some unavoidable natural disaster or as the result of wild volatility in a fast growing free market. It was neither. Governments are generally given credit for the ensuing economic recovery but this is a theory which is full of flaws. Not least because an analysis of the great depression highlights a disturbing role the governments had in the creation of the depression in the first place and then extending it needlessly! So I have reprinted the piece below to highlight some details the average history textbook (and average history teacher) leaves out. It starts by taking a look at the US president of the era.

The idea that Hoover was a champion of capitalism is wildly inaccurate. It was Roosevelt himself who attacked Hoover for taxing and spending too much. Roosevelt's running mate, John Nance Garner, charged that Hoover was "leading the country down the path of socialism." Contrary to the modern myth about Hoover, Roosevelt and Garner were absolutely right.

In his 1929 book, "America's Great Depression" Murray Rothbard, Using a broad measure that includes currency, demand and time deposits, and other ingredients, Rothhbard estimated that the Federal Reserve expanded the money supply by more than 60 percent from mid-1921 to mid-1929. The flood of this "easy money" drove interest rates down, pushed the stock market to dizzy heights, and gave impetus to what is now called the "Roaring Twenties." It is this, rather than the free market, which was a primary cause of the depression.

Roosevelts' New Deal is not the shining saviour its' often portrayed to be. Roosevelt secured passage of the Agricultural Adjustment Act, 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 the millions of others who had to pay those prices or make do with less to eat. It was the equivalent of smashing windows to help the glass industry.

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 NIRA was financed by new taxes on the very industries it controlled. Some economists have estimated that the NIRA increased 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 favourite 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!

The American economy was soon relieved of the burden of some of the New Deal's excesses when the Supreme Court outlawed the NIRA 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. It is they who should be heralded in history class, not Roosevelt.

After 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!

Next came the National Labor Relations Act in 1935 - better known as the Wagner Act : 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. 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 as it became a condition of work for many; by 1941 there were two and a half times as many Americans in unions as in 1935. From the White House, following the Wagner Act, came a barrage of insults against business. Businessmen which, Roosevelt said, 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."

I also intend to add more about the depression and Britain, whose abandonment of the gold standard also had a great (negative) impact globally. It is noted that the US Federal Reserve is strictly speaking a body that is not wholly owned by the US government, however it is naïve to think that US currency operates in a genuinely free market, the banking 'oligarchy' in the US and the political powers are said to have long exchanged favours. I have linked to a lengthy essay regarding the 1929 crash which finds reasons to blame the British for most US crashes. It is an interesting and eye opening piece but the author does seem to believe, among other things, that Hoover espoused "absurd free-market, laissez-faire ideology" which he certainly did not follow in office. The tone seems decidedly anti free market but is, in my interpretation, more against unlimited political power in financial systems. In a consistent free market society financial organisations could not abuse the relatively unlimited power of governments in the way they would be able to now, they would be unable to press through laws which protect their failings or have governments bail them out at people's expense. Often criticisms of the free market are criticism of unlimited political power (something many supporters of the free market need to be aware of)