Interventionist Policies Prolonged Rather than Curbed the Effects of the Great Depression, yet Instructors and Politicians Alike Laud FDR and Lobby Similar Efforts Today.
In my article of a couple months ago titled “Question Everything (and Everyone),” I advised outside research in understanding issues apt to political bias. Here, I investigate one of the most egregiously misunderstood and misrepresented historical phenomena in school curricula: The Great Depression. More specifically, how the United States entered and exited the Great Depression. A broad knowledge and perception of this moment in history is absolutely vital to reaching a true understanding of economic policy, yet teachers often misconstrue evidence and represent only the statist’s point of view on the matter; e.g. they use the “success” of the New Deal in ending the Great Depression to validate government intervention in the economy that pervades politics today. The reality is much different . . .
Rather than the oft-cited and irresponsible federal spending propagated by Franklin Delano Roosevelt, it was a return to reliance on the free market that freed the United States from the Great Depression. In fact, it was FDR’s swelling of the government’s infringement on the market that stifled investment and prolonged the effects of the Great Depression.
Concurring with this assessment was FDR’s Treasury Secretary, Henry Morgenthau Jr., a man who was in charge of keeping true to his President’s promises of giving “everyone a job that wanted it” and a man who, by accounts of my shallow reading, was as genuine as they come. The following is a quote by Morgenthau Jr. from a wonderfully insightful May 9th, 1939 Diary Entry/Transcript throughout the New Deal between high-ranking FDR Administration officials:
This really is an interesting read. It shows true and genuine intent that was met with what seems to be a pure triumph of reason. It is baffling that more people do not look at the consistently high unemployment unchanged by the New Deal as these proponents of the New Deal did.
“Now, gentlemen, we have tried spending money. We are spending more than we ever have spent before and it does not work . . . I say after eight years of this Administration [here in its sixth year] we have just as much unemployment as when we started . . . And an enormous debt to boot!”
They press onward, discussing the immediate need to raise already-high taxes to fund the programs that consistently failed to accomplish their goal.
Seeing that public works programs and other taxpayer/debt-funded employment programs were not of immediate success, FDR implemented secondary policies meant to increase wages and control prices. The more devastating of the policies are highlighted in Burt Folsom’s 2009 lecture for the Young America’s Foundation. Two of his examples were the National Industrial Recovery Act (NIRA) and the Agricultural Adjustment Act (AAA), both of which suffered in their goals due to massive corruption. Folsom notes the AAA inspectors, tasked with checking that farmers were cutting back on production (they did this in return for subsidies offered by the government; the purpose of the subsidies was to drive up food prices in order to assist farmer wages), were bribed to look the other way toward increases in production. The NIRA, on the other hand, though it was rightly deemed unconstitutional in 1935 by a 9-0 vote (this was before FDR’s efforts to intimidate the Supreme Court), forced certain prices on goods and threatened jail time for those who lowered prices below the government-mandated level. The utter negligence in this policy was egregious and both Acts show just how well New Deal government programs meant to meddle in the economy often work.
This essay is pay per view but UGA students can log into JSTOR via the Library website; it is well worth the read.
Moreover, Bradley A. Lee, in his essay titled “The New Deal Reconsidered” adds that the administration of resources, predictably, was apt to politically strategic rather than philanthropic disbursement:
“The states in the richest region of the country, the West, got 75 percent more federal relief and public works money per capita than those of the poorest region, the South. Anyone with a modicum of cynicism will (rightly) sense politics at work: The “Solid South” fared badly because the Democrats were sure of its electoral support. The Western states did well because their political loyalties were up for grabs.”
To conclude this section on what should be common knowledge about the failure of these many programs: In a landmark study for the UCLA Department of Economics, professors Harold L. Cole and Lee H. Ohanian discover that “anti-competition and pro-labor measures” signed into law by President FDR were ultimately to blame for the lengthening of the Great Depression.
Still many, even those who concur with the notion that FDR did more to worsen the Depression than curb it, view certain misleading graphics and assume that the Second World War ended the Great Depression, but that too is incorrect. War merely creates a cover-up for the state of any economy, much like any other form of mass government expenditure. The increases in GDP and employment during WWII were coming mostly through borrowing (debt owed by American taxpayers in later years which was also added as part of GDP) and was unsustainable in nature. It was only after WWII when the United States truly overcame the Great Depression. And not with government spending or a focus on the homeland, either. Rather, the Great Depression was overcome by a return in trust in the work that the private sector could accomplish for the country and its people.
See also the now-ironic but nevertheless massive success of the Nordic countries that sustained free market governing and recovered much faster from the Great Depression by way of wealth-creating innovation (SAAB, Securitas, and Volvo were created in the thirties).
Only after fiscal conservatism, in the form of post-war Republican majorities, was implemented through massive government layoffs, austerity measures, and reductions in spending did the economy recover in sustainable form. For sources and mostly concurring views on this opinion see Burt Folsom’s piece for the Foundation for Economic Education and Peter Ferrara’s article for Forbes Magazine (this latter is likely the better of the two).
Stephen Moore, Chief Economist of the Heritage Foundation, sums things up concisely:
“Here’s what happened: Government spending collapsed, from 41 percent of GDP in 1945 to 24 percent in 1946, then to under 15 percent by 1947 . . . Tax rates were cut, and wartime price controls were lifted. There was a very short eight-month recession, but then the private economy surged.
Personal consumption grew by 6.2 percent in 1945 and 12.4 percent in 1946, even as government spending crashed. Private investment spending grew by 28.6 percent.
The less the feds spent, the more people spent and invested. Keynesianism was turned on its head. Milton Friedman’s free-market advocacy was validated.
In 1946, the unemployment rate averaged below 4 percent and stayed that low for the better part of a decade. This all happened during the biggest reduction in government spending in U.S. history, under President Harry Truman.”
It is important to note also, especially to those who believe the free market to be the catalyst for the Depression, that further research shows Herbert Hoover (President before FDR at the onset of the Depression) was not actually the non-interventionist that he is often made out to be. The label is likely attributable to his ‘businessperson’ campaign and generally hands-off, laissez-faire rhetoric in regard to governing. A video from UCLA professor of economics, Lee Ohanian, however, argues that Hoover’s activity in meddling with government either spurred or worsened the Depression.
More to the point, Milton Friedman explains in a guest lecture that the fault of the Great Depression is neither on big business nor the free market, but rather on the Federal Reserve’s imperceptive monetary policy. Taking the Nobel Laureate’s point as truth, we can begin to consider that the mostly free market system, pre-Great Depression, was working. There was a (massive and very costly and tragic) hiccup (from the Fed, so Friedman and former Fed Chairman Ben Bernanke say) and then an incorrect slew of ‘corrective’ actions that followed via Hoover’s and Roosevelt’s presidencies, all of which subverted the self-correcting nature of the free market. And then a return to the significantly limited government system (via tax cuts, austerity measures, and a decrease in borrowing post-war) was the only thing the United States truly needed to return to its former prosperity.
Unfortunately for a Republic that was created to resist tyranny, the role of the executive was massively expanded in the process of the New Deal. Let us not forget that FDR passed thousands of executive orders during his tenure, often challenging the Supreme Court as in his executive ordering of internment camps.
Even more depressing is the baseless loss in faith by the less-informed, by various politicians, and by academia, in the righteous nature free market. Even some Republican lawmakers at times, though inhibited by what they believe to be the will of the masses, offer only half-satisfying defenses of the free market. The remaining party, alas, repackages the same, failing New Deal policies as ‘fiscal stimulus’ or ‘relief’ and hopes for differing results.
“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole notes in his study with Ohanian. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”
Let us hope this reality is not forgotten by policymakers of the future.
This analysis was adapted from a response of mine created for Dr. Leah Carmichael’s INTL 4630 International Political Economy course on the merits of NAFTA (I diverged from the main point quite a bit in order to ultimately arrive at the defense of free trade). To anyone in SPIA, I highly encourage enrollment in this course.
— Nick Geeslin is Editor-in-Chief of The Arch Conservative.