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Mackinac Center for Public Policy | Great Myths of the 1

“ believed government should Great no role in the .”

“GOVERNMENT PROGRAMS Myths helped lower by of the putting many to work.” “FRANKLIN ROOSEVELT’S ‘’ saved America from the Great failure of free- .” These and other Depression myths are dispelled This edition is a joint project of the Mackinac Center for Public Policy and the Foundation for Economic by the facts in this essay by Lawrence W. Reed Mackinac Center for Public Policy | Great Myths of the Great Depression 2

To James M. Rodney a great friend of truth, character and

Great Myths of the Great Depression by Lawrence W. Reed. Original edition printed in 1981. This edition was printed in 2010 as a joint project of the Mackinac Center and the Foundation for Economic Education. Mackinac Center for Public Policy | Great Myths of the Great Depression 1 Great Myths of the Great Depression

tudents today are often given a skewed account of the Great Depression of 1929-1941 that condemns free-market capitalism as the cause of, and promotes government intervention as the Ssolution to, the economic hardships of the era. In this essay based on a popular lecture, Mackinac Center for Public Policy President Lawrence W. Reed debunks the conventional view and traces the central role that poor government policy played in fostering this legendary catastrophe.

Introduction four workers was out of a at the Depression’s nadir, and ugly Many volumes have been written rumors of revolt simmered for the about the Great Depression of first time since the Civil . 1929-1941 and its impact on the lives of millions of Americans. “The terror of the Great Crash Historians, and has been the failure to explain it,” politicians have all combed the writes economist Alan Reynolds. THE GREAT DEPRESSION devastated every wreckage searching for the “ “People were left with the part of America, even its smallest towns. box” that will reveal the cause of feeling that massive economic the calamity. Sadly, all too many contractions could occur at of capitalism, the , of them decide to abandon their any moment, without warning, crashed and dragged America search, finding it easier perhaps without cause. That fear has into depression. President to circulate a host of false and been exploited ever since as the Herbert Hoover, an advocate harmful conclusions about the major justification for virtually of “hands-off,” or laissez-faire, events of seven decades ago. unlimited federal intervention , refused to use Consequently, many people in economic affairs.”1 the power of government and today continue to accept critiques conditions worsened as a result. of free-market capitalism that Old myths never die; they just It was up to Hoover’s successor, are unjustified and support keep showing up in Franklin Delano Roosevelt, government policies that are and political science textbooks. to ride in on the white horse economically destructive. With only an occasional of government intervention exception, it is there you will find and steer toward How bad was the Great what may be the ’s recovery. The apparent lesson Depression? Over the four years greatest myth: Capitalism to be drawn is that capitalism from 1929 to 1933, production at and the free- cannot be trusted; government the nation’s factories, mines and were responsible for the Great needs to take an active role in fell by more than half. Depression, and only government the economy to save us from People’s real disposable incomes intervention brought about inevitable decline. dropped 28 percent. Stock America’s . collapsed to one-tenth of their But those who propagate this pre-crash height. The number A Modern Tale version of history might just of unemployed Americans rose as well top off their remarks from 1.6 million in 1929 to 12.8 According to this simplistic by saying, “And Goldilocks million in 1933. One of every perspective, an important pillar found her way out of the forest, Mackinac Center for Public Policy | Great Myths of the Great Depression 2

Dorothy made it from Oz back There was already a long to , and Little Red Riding history of lending on Hood won the New York State stock exchanges, and margin Lottery.” The popular account of requirements — the share the Depression as outlined above of the purchase paid in belongs in a book of fairy tales cash — were no lower in the and not in a serious discussion late twenties than in the early of . twenties or in previous decades. In fact, in the fall of 1928 margin People who argue that the free-market requirements began to rise, and THe Great, economy collapsed of its own weight in borrowers were required to pay Great,Great,Great the seem utterly unaware of the Depression critical role played by the a larger share of the purchase System’s gross mismanagement of price of the stocks. To properly understand the and . events of the time, it is factually The margin lending argument appropriate to view the Great was disastrous intervention by doesn’t hold much water. Mischief Depression as not one, but four government, often in the form with the money and credit supply, consecutive downturns rolled into of political mismanagement of however, is another story. one. These four “phases” are:2 the money and credit supply. None of these depressions, Most monetary economists, I. and the however, lasted more than four particularly those of the “Austrian years and most of them were School,” have observed the close II. The Disintegration of the over in two. The calamity that relationship between money World Economy began in 1929 lasted at least supply and economic activity. three times longer than any of the When government inflates the III. The New Deal country’s previous depressions money and credit supply, IV. The Wagner Act because the government rates at first fall. Businesses compounded its initial errors with invest this “easy money” in new The first phase covers why the a series of additional and harmful production projects and a boom crash of 1929 happened in the interventions. takes place in capital . As first place; the other three show the boom matures, business how government intervention Central Planners Fail costs rise, interest rates readjust worsened it and kept the economy at Monetary Policy upward, and profits are squeezed. in a stupor for over a decade. Let’s The easy-money effects thus wear consider each one in turn. A popular explanation for the off and the monetary authorities, stock market collapse of 1929 fearing price , slow the Phase I: concerns the practice of borrowing growth of, or even contract, the The Business Cycle money to buy stock. Many history . In either case, texts blithely assert that a frenzied the manipulation is enough to The Great Depression was not the in shares was fed by knock out the shaky supports country’s first depression, though excessive “margin lending.” But from underneath the economic it proved to be the longest. Marquette University economist house of cards. Several others preceded it. Gene Smiley, in his 2002 book “Rethinking the Great Depression”, One prominent interpretation A common thread woven through explains why this is not a fruitful of the Federal Reserve System’s all of those earlier debacles observation: actions prior to 1929 can be found Mackinac Center for Public Policy | Great Myths of the Great Depression 3 in “America’s Great Depression” by economist . Using a broad measure that includes , and time deposits, and other ingredients, he estimated that the Fed bloated the money supply by more than 60 percent from mid- 1921 to mid-1929.3 Rothbard argued that this expansion of money and credit drove interest rates down, pushed the stock market to dizzy heights, and gave birth to the “.”

Unemployment skyrocketed after Congress raised tariffs and taxes in the early 1930s and Reckless money and credit growth stayed high as policies of the Roosevelt administration discouraged and recovery constituted what economist during the rest of the decade. Benjamin M. Anderson called “the beginning of the New Deal”4 prices lower than they would took further deflationary — the name for the better-known have otherwise been. action by aggressively selling but highly interventionist policies government securities for that would come later under Regarding Fed policy, free- months after the stock market President Franklin Roosevelt. market economists who differ on crashed. For the next three years, However, other scholars raise the extent of the Fed’s monetary the money supply shrank by 30 doubts that Fed action was expansion of the early and mid- percent. As prices then tumbled as inflationary as Rothbard are of one view about throughout the economy, the believed, pointing to relatively what happened next: The central Fed’s higher policy flat commodity and consumer bank presided over a dramatic boosted real (inflation-adjusted) prices in the 1920s as evidence contraction of the money supply rates dramatically. that monetary policy was not so that began late in the decade. The wildly irresponsible. federal government’s responses The most comprehensive to the resulting took chronicle of the monetary Substantial cuts in high a bad situation and made it far, policies of the period can be marginal rates in far worse. found in the classic work of Nobel the Coolidge years certainly Laureate and helped the economy and may The Bottom Drops Out his colleague , have ameliorated the price “A Monetary History of the United effect of Fed policy. Tax By 1928, the Federal Reserve States”, 1867-1960. Friedman and reductions spurred investment was raising interest rates and Schwartz argue conclusively that and real , choking off the money supply. the contraction of the nation’s which in turn yielded a burst of For example, its discount rate money supply by one-third technological advancement and (the rate the Fed charges member between August 1929 and March entrepreneurial discoveries of for loans) was increased 1933 was an enormous drag on cheaper ways to produce goods. four times, from 3.5 percent to the economy and largely the result This explosion in 6 percent, between January 1928 of seismic incompetence by the undoubtedly helped to keep and August 1929. The central Fed. The death in October 1928 Mackinac Center for Public Policy | Great Myths of the Great Depression 4 of Benjamin Strong, a powerful T h e n , o n O c t o b e r 3 , political forces for higher - figure who had exerted great stocks suffered their worst damaging tariffs were making influence as head of the Fed’s pummeling of the year. gains on Capitol Hill. New York district bank, left the Margin calls went out; some Fed floundering without capable traders grew apprehensive. The was only a leadership — making bad policy But the next day, prices rose reflection — not the direct cause even worse.5 again and thereafter seesawed — of the destructive government for a fortnight. policies that would ultimately At first, only the “smart” money produce the Great Depression: — the Bernard Baruchs and the The real crunch began on The market rose and fell in almost Joseph Kennedys who watched Wednesday, October 23, with direct synchronization with what things like money supply and what one observer called “a the Fed and Congress were doing. other government policies — Niagara of liquidation.” Six And what they did in the 1930s saw that the party was coming million shares changed hands. ranks way up there in the annals to an end. Baruch actually The industrial average fell 21 of history’s greatest follies. began selling stocks and buying points. “Tomorrow, the turn bonds and as early as will come,” brokers told one Buddy, Can You 1928; Kennedy did likewise, another. Prices, they said, had Spare $20 Million? commenting, “only a fool holds been carried to “unreasonably out for the top dollar.”6 low” levels. Black Thursday shook Michigan harder than almost any other The masses of investors But the next day, Black state. Stocks of auto and mining eventually sensed the change Thursday, stocks were dumped companies were hammered. Auto at the Fed and then the in even heavier selling ... the production in 1929 reached an stampede began. In a special ticker fell behind more than all-time high of slightly more issue commemorating the 50th 5 hours, and finally stopped than 5 million vehicles, then anniversary of the stock market grinding out quotations at quickly slumped by 2 million in collapse, U.S. News & World 7:08 p.m.7 1930. By 1932, near the deepest Report described it this way: point of the Depression, they had At their peak, stocks in the Dow fallen by another 2 million to just Actually the Great Crash Jones Industrial Average were 1,331,860 — down an astonishing was by no means a one- selling for 19 times earnings 75 percent from the 1929 peak. day affair, despite frequent — somewhat high, but hardly references to Black Thursday, what stock market analysts Thousands of investors October 24, and the following regard as a sign of inordinate everywhere, including many week’s Black Tuesday. As speculation. The distortions in well-known people, were hit early as September 5, stocks the economy promoted by the hard in the 1929 crash. Among were weak in heavy trading, Fed’s monetary policy had set the them was Winston Churchill. after having moved into new country up for a recession, but He had invested heavily in high ground two days earlier. other impositions to come would American stocks before the crash. Declines in early October soon turn the recession into a Afterward, only his writing skills were called a “desirable full-scale disaster. As stocks took and positions in government correction.” The a beating, Congress was playing restored his finances. Journal, predicting an autumn with fire: On the very morning rally, noted that “some stocks of Black Thursday, the nation’s Clarence Birdseye, an early rise, some fall.” newspapers reported that the developer of packaged frozen Mackinac Center for Public Policy | Great Myths of the Great Depression 5 foods, had sold his business for $30 million and put all his money into stocks. He was wiped out.

William C. Durant, founder of , lost more than $40 million in the stock market and wound up a virtual pauper. (GM itself stayed in the black throughout the Depression under the cost-cutting leadership of Alfred P. Sloan.)

President Herbert Hoover is mistakenly presented in standard history texts as a laissez- PhaSe II: faire president, but he signed into law so many costly and foolish bills that one of Franklin Disintegration of the Roosevelt’s top aides later said that “practically the whole New Deal was extrapolated from World Economy programs that Hoover started.”

Though modern myth claims that free-market philosophy? His 1930. It came on top of the the “self-destructed” opponent in the 1932 election, Fordney-McCumber of in 1929, government policy was Franklin Roosevelt, didn’t 1922, which had already put the debacle’s principal culprit. If think so. During the campaign, American in a tailspin this crash had been like previous Roosevelt blasted Hoover for during the preceding decade. The ones, the hard times would have spending and taxing too much, most protectionist legislation ended in two or three years at boosting the national , in U.S. history, Smoot-Hawley the most, and likely sooner than choking off trade, and putting virtually closed the borders that. But unprecedented political millions on the dole. He accused to foreign goods and ignited bungling instead prolonged the the president of “reckless a vicious international trade misery for over 10 years. and extravagant” spending, war. Professor Barry Poulson of thinking “that we ought to describes the of the act: Unemployment in 1930 averaged center control of everything a mildly recessionary 8.9 percent, in as rapidly as The act raised the rates on up from 3.2 percent in 1929. It possible,” and of presiding the entire range of dutiable shot up rapidly until peaking out over “the greatest spending commodities; for example, at more than 25 percent in 1933. administration in peacetime the average rate increased Until March of 1933, these were in all of history.” Roosevelt’s from 20 percent to 34 percent the years of President Herbert running mate, John Nance on agricultural products; Hoover — a man often depicted as Garner, charged that Hoover from 36 percent to 47 a champion of noninterventionist, was “leading the country down percent on wines, spirits, laissez-faire economics. the of .”8 Contrary and beverages; from 50 to 60 to the conventional view about percent on wool and woolen “ThE gReatest spendinG Hoover, Roosevelt and Garner manufactures. In all, 887 administration in were absolutely right. tariffs were sharply increased all of history” and the act broadened the list The crowning folly of the Hoover of dutiable commodities to Did Hoover really subscribe administration was the Smoot- 3,218 items. A crucial part to a “hands-off-the-economy,” Hawley Tariff, passed in June of the Smoot-Hawley Tariff Mackinac Center for Public Policy | Great Myths of the Great Depression 6

was that many tariffs were for nearly a third of their markets. a specific amount of money Farm prices plummeted and tens rather than a percentage of of thousands of farmers went the price. As prices fell by bankrupt. A bushel of wheat that half or more during the Great sold for $1 in 1929 was selling for Depression, the effective a mere 30 cents by 1932. rate of these specific tariffs doubled, increasing the With the collapse of agriculture, protection afforded under rural banks failed in record the act.9 numbers, dragging down hundreds of thousands of their Smoot-Hawley was as broad as it customers. Nine thousand banks was deep, affecting a multitude closed their doors in the United of products. Before its passage, States between 1930 and 1933. Americans voted for Franklin Roosevelt clocks had faced a tariff of 45 in 1932 expecting him to adhere to the The stock market, which had percent; the act raised that to Democratic , which called for regained much of the ground 55 percent, plus as much as less and . it had lost since the previous another $4.50 per clock. Tariffs October, tumbled 20 points on on corn and butter were roughly solve the nagging unemployment the day Hoover signed Smoot- doubled. Even sauerkraut was problem. But they ignored Hawley into law, and fell almost tariffed for the first time. Among an important principle of without respite for the next the few remaining tariff-free international commerce: Trade two years. (The market’s high, goods, strangely enough, were is ultimately a two-way street; as measured by the Dow Jones leeches and skeletons (perhaps if foreigners cannot sell their Industrial Average, was set on as a political sop to the American goods here, then they cannot Sept. 3, 1929, at 381. It hit its Medical Association, as one wag earn the dollars they need to 1929 low of 198 on Nov. 13, then wryly remarked). buy here. Or, to put it another rebounded to 294 by April 1930. way, government cannot shut off It declined again as the tariff bill Tariffs on linseed oil, tungsten, imports without simultaneously made its way toward Hoover’s and casein hammered the U.S. shutting off exports. desk in June and did not bottom paint, steel and paper industries, out until it reached a mere 41 two respectively. More than 800 items You Tax Me, I Tax You years later. It would be a quarter- used in automobile production century before the Dow would were taxed by Smoot-Hawley. Foreign companies and their climb to 381 again.) Most of the 60,000 people workers were flattened by employed in U.S. plants making Smoot-Hawley’s steep tariff rates The shrinkage in world trade cheap clothing out of imported and foreign governments soon brought on by the tariff wool rags went home jobless retaliated with trade barriers helped set the for World after the tariff on wool rags rose of their own. With their ability War II a few years later. In 1929, the by 140 percent.10 to sell in the American market rest of the world owed American severely hampered, they curtailed citizens $30 billion. ’s Officials in the administration their purchases of American was struggling and in Congress believed that goods. American agriculture to pay the enormous reparations raising trade barriers would force was particularly hard hit. With bill imposed by the disastrous Americans to buy more goods a stroke of the presidential pen, . When tariffs made at home, which would farmers in this country lost made it nearly impossible for Mackinac Center for Public Policy | Great Myths of the Great Depression 7 foreign businessmen to sell their government’s share of GNP goods in American markets, soared from 16.4 percent to 21.5 the burden of their percent.12 Hoover’s agricultural became massively heavier and doled out hundreds emboldened like of millions of dollars to wheat . “When goods don’t and cotton farmers even as cross frontiers, armies will,” warns the new tariffs wiped out their an old but painfully true maxim. markets. His Reconstruction Finance Corporation ladled Free Markets or out billions more in business Free Lunches? subsidies. Commenting decades later on Hoover’s administration, Smoot-Hawley by itself should Rexford Guy Tugwell, one of the lay to rest the myth that Hoover architects of Franklin Roosevelt’s was a free market practitioner, policies of the 1930s, explained, but there is even more to the “We didn’t admit it at the time, but story of his administration’s practically the whole New Deal President Franklin Roosevelt decried was extrapolated from programs as selfish “economic royalists” those interventionist mistakes. Within businessmen who opposed the burdensome 13 a month of the stock market that Hoover started.” taxes and of his “New Deal.” crash, he convened conferences of business leaders for the Though Hoover at first did lower Compounding the error of purpose of jawboning them into taxes for the poorest of Americans, high tariffs, huge subsidies and keeping artificially high Larry Schweikart and Michael deflationary monetary policy, even though both profits and Allen in their sweeping “A Patriot’s Congress then passed and prices were falling. Consumer History of the : From Hoover signed the Revenue Act prices plunged almost 25 percent Columbus’s Great Discovery to of 1932. The largest tax increase between 1929 and 1933 while the ” stress that in peacetime history, it doubled nominal wages on average he “offered no incentives to the the income tax. The top bracket decreased only 15 percent — wealthy to invest in new plants to actually more than doubled, translating into a substantial stimulate hiring.” He even taxed soaring from 24 percent to increase in wages in real terms, bank checks, “which accelerated 63 percent. Exemptions were a major component of the cost the decline in the availability of lowered; the earned income of doing business. As economist money by penalizing people for credit was abolished; corporate Richard Ebeling notes, “The writing checks.”14 and estate taxes were raised; ‘high-’ policy of the Hoover new gift, gasoline and auto taxes administration and the trade In September 1931, with the were imposed; and postal rates unions ... succeeded only in money supply tumbling and were sharply hiked. pricing workers out of the labor the economy reeling from the market, generating an increasing impact of Smoot-Hawley, the Can any serious scholar observe circle of unemployment.”11 Fed imposed the biggest hike the Hoover administration’s in its discount rate in history. massive economic intervention Hoover dramatically increased Bank deposits fell 15 percent and, with a straight face, pronounce government spending for within four months and sizable, the inevitably deleterious effects subsidy and relief schemes. In deflationary declines in the as the fault of free markets? the space of one year alone, nation’s money supply persisted Schweikart and Allen survey some from 1930 to 1931, the federal through the first half of 1932. of the wreckage: Mackinac Center for Public Policy | Great Myths of the Great Depression 8

By 1933, the numbers the sort of difference for which produced by this comedy the country had hoped. He of errors were staggering: started off on the wrong foot national unemployment when, in his inaugural address, rates reached 25 percent, but he blamed the Depression on within some cities, “unscrupulous money changers.” the statistics seemed beyond He said nothing about the role comprehension. of the Fed’s mismanagement reported that 50 percent of its and little about the follies of labor force was unemployed; To many Americans, the National Recovery Congress that had contributed Toledo, 80 percent; and some Administration’s bureaucracy and mind- to the problem. As a result of numbing regulations became known as the states even averaged over 40 “National Run Around.” his efforts, the economy would percent. Because of the dual- linger in depression for the edged sword of declining budget, a sound gold currency “to rest of the decade. Adapting a revenues and increasing be preserved at all hazards,” the phrase from 19th century writer welfare , the burden removal of government from areas , Roosevelt on the cities pushed many that belonged more appropriately famously declared in his address municipalities to the brink. to private enterprise and an end that, “We have nothing to fear Schools in New York shut to the “extravagance” of Hoover’s but fear itself.” But as Dr. Hans down, and teachers in farm programs. This is what Sennholz of Grove City College were owed some $20 million. candidate Roosevelt promised, explains, it was FDR’s policies Private schools, in many but it bears no resemblance to to come that Americans had cases, failed completely. One what President Roosevelt actually genuine reason to fear: government study found that delivered. by 1933 some fifteen hundred In his first 100 days, he swung colleges had gone belly-up, Washington was rife with both hard at the order. and book sales plummeted. fear and optimism as Roosevelt Instead of clearing away the Chicago’s library system did was sworn in on March 4, 1933 — prosperity barriers erected not purchase a single book in fear that the economy might not by his predecessor, he built a year-long period.15 recover and optimism that the new new ones of his own. He and assertive president just might struck in every known way Phase III: The New Deal make a difference. Humorist Will at the integrity of the U.S. Rogers captured the popular feeling dollar through quantitative Franklin Delano Roosevelt won toward FDR as he assembled the increases and qualitative the 1932 presidential election in a new administration: “The whole deterioration. He seized the landslide, collecting 472 electoral country is with him, just so he does people’s gold holdings and votes to just 59 for the incumbent something. If he burned down the subsequently devalued the Herbert Hoover. The platform Capitol, we would all and say, dollar by 40 percent.17 of the Democratic Party, whose well, we at least got a fire started ticket Roosevelt headed, declared, anyhow.”16 Frustrated and angered that “We believe that a party platform Roosevelt had so quickly and is a covenant with the people to “Nothing to fear thoroughly abandoned the be faithfully kept by the party but fear itself” platform on which he was entrusted with power.” It called for elected, Director of the Bureau a 25 percent reduction in federal Roosevelt did indeed make a of the Budget Lewis W. Douglas spending, a balanced federal difference, though probably not resigned after only one year on Mackinac Center for Public Policy | Great Myths of the Great Depression 9 the job. At in May 1935, Douglas made it plain that America was facing a momentous choice:

Will we choose to subject ourselves — this great country — to the despotism of bureaucracy, controlling our every act, destroying what equality we have attained, reducing us eventually to the condition of impoverished This 1989 photo is of a bridge built from 1936-41 as part of a Works Progress Administration slaves of the state? Or will we (WPA) project in Coleman , . Many Americans saw such projects as helpful, cling to the for which without considering their high cost and the corruption that plagued the program. man has struggled for more than a thousand years? It is “banking holiday” on March He points out that “Almost all important to understand the 6 (which did not completely the failed banks were in states magnitude of the issue before end until nine days later) is still with unit banking laws” — laws us. ... If we do not elect to hailed as a decisive and necessary that prohibited banks from have a tyrannical, oppressive action by Roosevelt apologists. opening branches and thereby bureaucracy controlling our Friedman and Schwartz, however, diversifying their portfolios and lives, destroying progress, make it plain that this supposed reducing their risks. Powell depressing the standard cure was “worse than the disease.” writes: “Although the United of living ... then should it The Smoot-Hawley tariff and the States, with its unit banking laws, not be the function of the Fed’s unconscionable monetary had thousands of bank failures, Federal government under mischief were primary culprits Canada, which permitted branch a to limit its in producing the conditions that banking, didn’t have a single activities to those which a gave Roosevelt his excuse to failure ...”20 Strangely, critics of democracy may adequately temporarily deprive depositors capitalism who love to blame the deal, such for example as of their money, and the bank market for the Depression never national defense, maintaining holiday did nothing to alter those mention that fact. law and order, protecting fundamentals. “More than 5,000 life and , preventing banks still in operation when Congress gave the president the dishonesty, and ... guarding the holiday was declared did power first to seize the private the public against ... vested not reopen their doors when it gold holdings of American special ?18 ended, and of these, over 2,000 citizens and then to fix the never did thereafter,” report price of gold. One morning, as 19 New Dealing from the Friedman and Schwartz. Roosevelt ate eggs in bed, he Bottom of the Deck and Secretary of the Treasury Economist Jim Powell of the Cato Henry Morgenthau decided Crisis gripped the banking Institute authored a splendid to change the ratio between system when the new president book on the Great Depression gold and paper dollars. After assumed office on March 4, 1933. in 2003, titled “FDR’s Folly: How weighing his options, Roosevelt Roosevelt’s action to close the Roosevelt and His New Deal settled on a 21 cent price hike banks and declare a nationwide Prolonged the Great Depression”. because “it’s a lucky number.” Mackinac Center for Public Policy | Great Myths of the Great Depression 10

In his diary, Morgenthau wrote, and imposing the nation’s first “If anybody ever knew how comprehensive we really set the gold price law in 1938. While to this day through a combination of lucky he gets a great deal of credit for numbers, I think they would these two measures from the be frightened.”21 Roosevelt also general public, many economists single-handedly torpedoed the have a different perspective. The London Economic Conference prices many of in 1933, which was convened the inexperienced, the young, the at the request of other major unskilled and the disadvantaged nations to bring down tariff rates out of the labor market. (For and restore the . example, the minimum wage provisions passed as part of Washington and its reckless Michigan Senator another act in 1933 threw an had already made argued that a sound economy could not be estimated 500,000 out mincemeat of the gold standard restored through FDR’s punitive tax and of work).24 And current studies regulatory measures. by the early 1930s. Roosevelt’s and estimates reveal that Social rejection of it removed most of Prohibition. The House approved Security has become such a long- the remaining impediments to a repeal measure on Tuesday, the term actuarial nightmare that it limitless currency and credit Senate passed it on Thursday and will either have to be privatized or expansion, for which the nation before the year was out, enough the already high taxes needed to would pay a high price in later states had ratified it so that the keep it afloat will have to be raised years in the form of a depreciating 21st Amendment became part of to the stratosphere. currency. Sen. put it the Constitution. One observer, well when he warned Roosevelt commenting on this remarkable Roosevelt secured passage of in early 1933: “It’s dishonor, sir. turn of events, noted that of two the Agricultural Adjustment This great government, strong in men walking down the street at Act, which levied a new tax gold, is breaking its promises to the start of 1933 — one with a on agricultural processors and pay gold to widows and orphans in his pocket and the used the revenue to supervise to whom it has sold government other with a bottle of whiskey in the wholesale destruction bonds with a pledge to pay gold his coat — the man with the coin of valuable crops and cattle. coin of the present standard of would be an upstanding citizen Federal agents oversaw the ugly . It is breaking its promise to and the man with the whiskey spectacle of perfectly good fields redeem its paper money in gold would be the outlaw. A year later, of cotton, wheat and corn being coin of the present standard of precisely the reverse was true. plowed under (the mules had value. It’s dishonor, sir.”22 to be convinced to trample the In the first year of the New Deal, crops; they had been trained, of Though he seized the country’s Roosevelt proposed spending $10 course, to walk between the rows). gold, Roosevelt did return billion while revenues were only Healthy cattle, sheep and pigs were booze to America’s bars and $3 billion. Between 1933 and 1936, slaughtered and buried in mass parlor rooms. On his second government expenditures rose by graves. Secretary of Agriculture Sunday in the White House, he more than 83 percent. Federal debt Henry Wallace personally gave remarked at dinner, “I think this skyrocketed by 73 percent. the order to slaughter 6 million would be a good time for beer.”23 baby pigs before they grew to That same night, he drafted a FDR talked Congress into full size. The administration also message asking Congress to end creating Social Security in 1935 paid farmers for the first time Mackinac Center for Public Policy | Great Myths of the Great Depression 11 for not working at all. Even if the AAA had helped farmers by curtailing supplies and raising prices, it could have done so only by hurting millions of others who had to pay those prices or make do with less to eat.

Blue Eagles, Red Ducks

Perhaps the most radical aspect of the New Deal was the National Industrial Recovery Act, passed At the nadir of the Great Depression, half of American industrial production was idle as the in June 1933, which created economy reeled under the weight of endless and destructive policies from both Republicans a massive new bureaucracy and Democrats in Washington. called the National Recovery Administration. Under the NRA, dropped 25 percent. Benjamin to the manufacture of corsets most manufacturing industries M. Anderson writes, “NRA was and brassieres, covering more were suddenly forced into not a revival measure. It was an than 2 million employers and government-mandated . antirevival measure. ... Through 22 million workers.”26 There Codes that regulated prices and the whole of the NRA period were codes for the production terms of sale briefly transformed industrial production did not of hair tonic, dog leashes, and much of the American economy rise as high as it had been in July even musical comedies. A New into a fascist-style arrangement, 1933, before NRA came in.”25 Jersey tailor named Jacob Maged while the NRA was financed by was arrested and sent to jail for new taxes on the very industries The man Roosevelt picked the “crime” of pressing a suit it controlled. Some economists to direct the NRA effort was of clothes for 35 cents rather have estimated that the NRA General Hugh “Iron Pants” than the NRA-inspired “Tailor’s boosted the cost of doing business Johnson, a profane, red-faced Code” of 40 cents. by an average of 40 percent — not bully and professed admirer of something a depressed economy Italian dictator . In “The Roosevelt Myth”, historian needed for recovery. Thundered Johnson, “May John T. Flynn described how Almighty God have mercy on the NRA’s partisans sometimes The economic impact of the NRA anyone who attempts to interfere conducted “business”: was immediate and powerful. with the Blue Eagle” (the official In the five months leading up symbol of the NRA, which one The NRA was discovering to the act’s passage, signs of senator derisively referred to as it could not enforce its recovery were evident: factory the “Soviet duck”). Those who rules. Black markets grew and had refused to comply with the NRA up. Only the most violent increased by 23 and 35 percent, Johnson personally threatened police methods could procure respectively. Then came the NRA, with public boycotts and “a enforcement. In Sidney shortening hours of work, raising punch in the nose.” Hillman’s garment industry wages arbitrarily and imposing the code authority employed other new costs on enterprise. There were ultimately more than enforcement police. They In the six months after the law 500 NRA codes, “ranging from roamed through the garment took effect, industrial production the production of lightning rods district like storm troopers. Mackinac Center for Public Policy | Great Myths of the Great Depression 12

They could enter a man’s his State of the Union message factory, send him out, line up that any new such program his employees, subject them would be abolished within a to minute interrogation, take year. “The federal government,” over his books on the instant. said the president, “must and Night work was forbidden. shall quit this business of relief. Flying squadrons of these I am not willing that the vitality private coat-and-suit police of our people be further stopped went through the district at by the giving of cash, of market night, battering down doors The Supreme Court came under baskets, of a few bits of weekly attack by President Roosevelt because it with axes looking for men declared important parts of the “New Deal” work cutting grass, raking who were committing the unconstitutional. FDR’s “court-packing” leaves, or picking up papers crime of sewing together a scheme contributed to the resumption of in the public parks.” Harry in 1937. pair of pants at night. But Hopkins was put in charge of without these harsh methods people need to be regimented by the agency and later said, “I’ve many code authorities said powerful overlords in order to got four million at work but for there could be no compliance be saved.”29 God’s sake, don’t ask me what because the public was not they are doing.” The CWA came back of it.27 Alphabet commissars spent to an end within a few months the public’s money like it was but was replaced with another The Alphabet so much bilge. They were what temporary relief program Commissars influential journalist and social that evolved into the Works critic had in Progress Administration, or Roosevelt next signed into law mind when he described the WPA, by 1935. It is known steep income tax increases on the New Deal as “a nation-wide, today as the very government higher brackets and introduced State-managed of program that gave rise to a 5 percent withholding tax inane buffoonery and aimless the new term, “boondoggle,” on corporate dividends. He commotion.”30 because it “produced” a lot secured another tax increase in more than the 77,000 bridges 1934. In fact, tax hikes became Roosevelt’s Civil Works and 116,000 buildings to which a favorite policy of Roosevelt for Administration hired actors to its advocates loved to point as the next 10 years, culminating give free shows and librarians evidence of its efficacy.31 in a top income tax rate of 90 to catalog archives. It even percent. Sen. Arthur Vandenberg paid researchers to study the With good reason, critics often of Michigan, who opposed much history of the safety pin, hired referred to the WPA as “We Piddle of the New Deal, lambasted 100 Washington workers to Around.” In Kentucky, WPA Roosevelt’s massive tax increases. patrol the streets with balloons workers catalogued 350 different A sound economy would not be to frighten starlings away from ways to cook spinach. The agency restored, he said, by following public buildings, and put men employed 6,000 “actors” though the socialist notion that America on the public to chase the nation’s actors’ union claimed could “lift the lower one-third tumbleweeds on windy days. only 4,500 members. Hundreds up” by pulling “the upper two- of WPA workers were used to thirds down.”28 Vandenberg also The CWA, when it was started collect campaign contributions condemned “the congressional in the fall of 1933, was supposed for Democratic Party candidates. surrender to alphabet commissars to be a -lived program. In , WPA workers who deeply believe the American Roosevelt assured Congress in were fired if they refused to Mackinac Center for Public Policy | Great Myths of the Great Depression 13 donate 2 percent of their wages hires someone to catalog the to the incumbent . By many ways of cooking spinach, his 1941, only 59 percent of the tax-supported paycheck cannot WPA budget went to paying be counted as a increase workers anything at all; the rest to the economy because the was sucked up in administration used to pay him was and overhead. The editors of simply diverted, not created. asked, “Has Economists today must still battle [Roosevelt] the moral stature to this “magical thinking” every time admit now that the WPA was more government spending is Special powers granted to organized labor with the passage of the Wagner Act a hasty and grandiose political proposed — as if money comes contributed to a wave of militant strikes and a gesture, that it is a wretched not from productive citizens, but “depression within a depression” in 1937. failure and should be abolished?”32 rather from the tooth fairy. The last of the WPA’s projects was ‘a gang of half-educated peda- not eliminated until July of 1943. “An astonishing gogues, nonconstitutional rabble of impudent lawyers, starry-eyed uplifters Roosevelt has been lauded for nobodies” and other such sorry wizards.’ his “job-creating” acts such as His New Deal was a ‘political the CWA and the WPA. Many Roosevelt’s haphazard economic racket,’ a ‘series of stupendous people think that they helped re- interventions garnered credit from bogus miracles,’ with its ‘con- lieve the Depression. What they people who put high value on the stant appeals to class envy fail to realize is that it was the appearance of being in charge and and hatred,’ treating govern- rest of Roosevelt’s tinkering that “doing something.” Meanwhile, the ment as ‘a milch-cow with prolonged the Depression and great majority of Americans were 125 million teats’ and marked which largely prevented the job- patient. They wanted very much to by ‘frequent repudiations of less from finding real jobs in the give this charismatic polio victim categorical pledges.’33 first place. The stupefying roster and former New York governor the of wasteful spending generated benefit of the doubt. But Roosevelt Signs of Life by these jobs programs repre- had his critics, and they sented a diversion of valuable would grow more numerous as the The American economy was soon resources to politically motivated years groaned on. One of them was relieved of the burden of some and economically counterpro- the inimitable “Sage of Baltimore,” of the New Deal’s worst excesses ductive purposes. H. L. Mencken, who rhetorically when the Supreme Court outlawed threw everything but the kitchen the NRA in 1935 and the AAA in A brief analogy will illustrate sink at the president. Paul Johnson 1936, earning Roosevelt’s eternal this point. If a thief goes house sums up Mencken’s stinging but wrath and derision. Recognizing to house robbing everybody in often-humorous barbs this way: much of what Roosevelt did as the neighborhood, then heads unconstitutional, the “nine old off to a nearby shopping mall Mencken excelled himself men” of the Court also threw to spend his ill-gotten loot, it is in attacking the triumphant out other, more minor acts not assumed that because his FDR, whose whiff of fraudu- and programs which hindered spending “stimulated” the stores at lent collectivism filled him recovery. the mall he has thereby performed with genuine disgust. He was a national or provided the ‘Fuhrer,’ the ‘Quack,’ sur- Freed from the worst of the New a general economic benefit. rounded by ‘an astonishing Deal, the economy showed some Likewise, when the government rabble of impudent nobodies,’ signs of life. Unemployment Mackinac Center for Public Policy | Great Myths of the Great Depression 14 dropped to 18 percent in 1935, NRA and its labor codes. It against business. Businessmen, 14 percent in 1936, and even aimed at crushing all employ- Roosevelt fumed, were obstacles lower in 1937. But by 1938, er resistance to labor unions. on the road to recovery. He blasted it was back up to nearly 20 Anything an employer might them as “economic royalists” and percent as the economy slumped do in self-defense became an said that businessmen as a class again. The stock market crashed “unfair labor practice” punish- were “stupid.”36 He followed up the nearly 50 percent between able by the Board. The law not insults with a rash of new punitive August 1937 and March 1938. only obliged employers to deal measures. New strictures on the The “economic ” of and bargain with the unions stock market were imposed. A tax Franklin Delano Roosevelt’s New designated as the employees’ on corporate retained earnings, Deal had achieved a real “first”: representative; later Board de- called the “undistributed profits a depression within a depression! cisions also made it unlawful tax,” was levied. “These soak-the- to resist the demands of labor rich efforts,” writes economist 34 Phase IV: union leaders. Robert Higgs, “left little doubt The Wagner Act that the president and his Armed with these sweeping administration intended to push The stage was set for the 1937-38 new powers, labor unions went through Congress everything collapse with the passage of the on a militant organizing frenzy. they could to extract wealth National Labor Relations Act Threats, boycotts, strikes, from the high-income earners in 1935 — better known as the seizures of plants and widespread responsible for making the bulk “Wagner Act” and organized violence pushed productivity of the nation’s decisions about labor’s “Magna Carta.” To quote down sharply and unemployment private investment.”37 Sennholz again: up dramatically. Membership in the nation’s labor unions soared: During a period of barely two This law revolutionized By 1941, there were two and a months during late 1937, the American labor relations. It half times as many Americans market for steel — a key economic took labor disputes out of the in unions as had been the case barometer — plummeted from 83 courts of law and brought in 1935. Historian William E. percent of capacity to 35 percent. them under a newly created Leuchtenburg, himself no friend When that news emblazoned Federal agency, the National of free enterprise, observed, headlines, Roosevelt took an Labor Relations Board, which “Property-minded citizens were ill-timed nine-day fishing trip. became prosecutor, judge, and scared by the seizure of factories, The New York Herald-Tribune jury, all in one. Labor union incensed when strikers interfered implored him to get back to work sympathizers on the Board with the mails, vexed by the to stem the tide of the renewed further perverted this law, intimidation of nonunionists, Depression. What was needed, which already afforded legal and alarmed by flying squadrons said the newspaper’s editors, was immunities and privileges to of workers who marched, or a reversal of the Roosevelt policy labor unions. The U.S. thereby threatened to march, from city “of bitterness and hate, of setting abandoned a great achievement to city.”35 class against class and punishing of civilization, equality all who disagreed with him.”38 under the law. An Unfriendly Climate for Business Columnist The Wagner Act, or National wrote in March 1938 that “with Labor Relations Act, was From the White House on the almost no important exception passed in reaction to the heels of the Wagner Act came every measure he [Roosevelt] has Supreme Court’s voidance of a thunderous barrage of insults been interested in for the past Mackinac Center for Public Policy | Great Myths of the Great Depression 15 five months has been to reduce on the nation’s banks. Experience the war effort instead of into plant or discourage the production of has shown time and again that a expansion or consumer goods. wealth.”39 roller-coaster monetary policy Not until both Roosevelt and the is enough by itself to produce a war were gone did investors feel As pointed out earlier in this roller-coaster economy. confident enough to “set in motion essay, Herbert Hoover’s own the postwar investment boom that version of a “New Deal” had hiked Still stinging from his earlier powered the economy’s return to the top marginal income tax rate Supreme Court defeats, Roosevelt sustained prosperity.”42 from 24 to 63 percent in 1932. tried in 1937 to “pack” the Supreme But he was a piker compared to Court with a proposal to allow the This view gains support in these his tax-happy successor. Under president to appoint an additional comments from one of the country’s Roosevelt, the top rate was raised justice to the Court for every leading investors of the time, at first to 79 percent and then later sitting justice who had reached the Lammot du Pont, offered in 1937: to 90 percent. Economic historian age of 70 and did not retire. Had Burton Folsom notes that in this proposal passed, Roosevelt rules the tax 1941 Roosevelt even proposed a could have appointed six new situation, the labor situation, whopping 99.5-percent marginal justices favorable to his views, the monetary situation, and rate on all incomes over $100,000. increasing the members of the practically every legal condition “Why not?” he said when an Court from 9 to 15. His plan failed under which industry must advisor questioned the idea.40 in Congress, but the Court later operate. Are taxes to go higher, began rubber-stamping his policies lower or stay where they are? After that confiscatory proposal after a number of opposing justices We don’t know. Is labor to be failed, Roosevelt issued an retired. Until Congress killed union or non-union? . . . Are we executive order to tax all income the packing scheme, however, to have inflation or , over $25,000 at the astonishing business fears that a Court more government spending or rate of 100 percent. He also sympathetic to Roosevelt’s goals less? ... Are new restrictions to promoted the lowering of the would endorse more of the old be placed on capital, new limits personal exemption to only New Deal prevented investment on profits? ... It is impossible to $600, a tactic that pushed most and from reviving. even guess at the answers.”43 American families into paying at least some income tax for the first Economic historian Robert Higgs Many modern historians tend time. Shortly thereafter, Congress draws a close connection between to be reflexively anti-capitalist rescinded the executive order, but the level of private investment and distrustful of free markets; went along with the reduction of and the course of the American they find Roosevelt’s exercise of the personal exemption.41 economy in the 1930s. The power, constitutional or not, to relentless assaults of the Roosevelt be impressive and historically Meanwhile, the Federal Reserve administration — in both word and “interesting.” In surveys, a again seesawed its monetary deed — against business, property, majority consistently rank policy in the mid-1930s, first and free enterprise guaranteed FDR near the top of the list for up then down, then up sharply that the capital needed to jump- presidential greatness, so it is through America’s entry into start the economy was either taxed likely they would disdain the World War II. Contributing to the away or forced into hiding. When notion that the New Deal was economic slide of 1937 was this FDR took America to war in 1941, responsible for prolonging the fact: From the summer of 1936 he eased up on his anti-business Great Depression. But when a to the spring of 1937, the Fed agenda, but a great deal of the nationally representative poll doubled reserve requirements nation’s capital was diverted into by the American Institute of Mackinac Center for Public Policy | Great Myths of the Great Depression 16

Public Opinion in the spring less government. He instead gave policies included a litany of of 1939 asked, “Do you think Americans more government, political missteps: central bank the attitude of the Roosevelt but he did so with fanfare and mismanagement, trade-crushing administration toward business that mesmerized tariffs, incentive-sapping taxes, is delaying business recovery?” the a desperate people. By the time mind-numbing controls on American people responded “yes” they began to realize that his production and , by a margin of more than 2-to-1. policies were harmful, World senseless destruction of crops The business community felt even War II came, the people rallied and cattle and coercive labor more strongly so.44 around their commander-in- laws, to recount just a few. It chief, and there was little desire was not the free market that In his private diary, FDR’s very to change the proverbial horse produced 12 years of agony; own Treasury Secretary, Henry in the middle of the stream by rather, it was political bungling Morgenthau, seemed to agree. He electing someone new. on a grand scale. wrote: “We have tried spending money. We are spending more Along with of Those who can survey the events than we have ever spent before World War II came a revival of of the 1920s and 1930s and and it does not work. ... We trade with America’s allies. The blame free-market capitalism have never made good on our war’s destruction of people and for the economic calamity have promises. ... I say after eight years resources did not help the U.S. their eyes, ears and minds firmly of this Administration we have economy, but this renewed trade closed to the facts. Changing just as much unemployment did. A reinflation of the nation’s the wrong-headed thinking that as when we started ... and an money supply counteracted the constitutes much of today’s enormous debt to boot!”45 high costs of the New Deal, but about this brought with it a problem that sordid historical episode is vital At the end of the decade and plagues us to this day: a dollar to reviving faith in free markets 12 years after the stock market that buys less and less in goods and preserving our liberties. crash of Black Thursday, 10 and services year after year. million Americans were jobless. Most importantly, the Truman The nation managed to survive The unemployment rate was in administration that followed both Hoover’s activism and excess of 17 percent. Roosevelt Roosevelt was decidedly less eager Roosevelt’s New Deal quackery, had pledged in 1932 to end to berate and bludgeon private and now the American heritage the crisis, but it persisted two investors and as a result, those of freedom awaits a rediscovery presidential terms and countless investors re-entered the economy by a new of citizens. interventions later. and fueled a powerful postwar This time we have nothing to fear boom. The Great Depression but myths and misconceptions. finally ended, but it should linger Whither Free - END - Enterprise? in our minds today as one of the most colossal and tragic failures How was it that FDR was elected of government and public policy Postscript: four times if his policies were in American history. Have We Learned Our deepening and prolonging an Lessons? economic catastrophe? Ignorance The genesis of the Great and a willingness to give the Depression lay in the irresponsible Eighty years after the Great president the benefit of the doubt monetary and fiscal policies of Depression began, the literature explain a lot. Roosevelt beat the U.S. government in the late on this painful episode of Hoover in 1932 with promises of 1920s and early 1930s. These American history is undergoing Mackinac Center for Public Policy | Great Myths of the Great Depression 17 an encouraging metamorphosis. While Americans may be The taxpayer of agencies The conventional assessment that unlearning some of what they such as and Freddie so dominated historical writings thought they knew about the Mac, as well as a growing number for decades argued that free Great Depression, that’s not of private firms in the early fall of markets caused the debacle and the same as saying we have 2008, represent more folly with a that FDR’s New Deal saved the learned the important lessons monumental price tag. Not only country. Surely, there are plenty well enough to avoid making the will we and future be of poorly-informed partisans, same mistakes again. Indeed, paying those bills for decades, the ideologues and quacks that still today we are no closer to fixing very process of throwing good make these superficial claims. the primary cause of the business money after bad will pile moral Serious historians and economists, cycle — monetary mischief — hazard on top of moral hazard, however, have been busy chipping than we were 80 years ago. fostering more bad decisions away at the falsehoods. The essay and future bailouts. This is the you have just read cites many The that gripped stuff that undermines both free recent works worth careful reading America in 2008 ought to be a enterprise and the soundness in their entirety. wake-up call. The fingerprints of the currency. Much more of government meddling are inflation to pay these bills is At the very moment this latest all over it. From 2001 to 2005, more than a little likely, sooner edition of “Great Myths of the the Federal Reserve revved up or later. Great Depression” was about to the money supply, expanding it go to press, Simon & Schuster at a feverish double-digit rate. “Government,” observed the published a splendid new volume The dollar plunged in overseas renowned Austrian economist I strongly recommend. Authored markets and commodity prices , “is the only by the Foundation for Economic soared. With the banks flush with institution that can take a Education’s senior historian and liquidity from the Fed, interest valuable commodity like paper, professor, Dr. rates plummeted and risky and make it worthless by applying Burton W. Folsom, the book loans to borrowers of dubious ink.” Mises was describing the is provocatively titled “New merit ballooned. Politicians curse of inflation, the process Deal or Raw Deal? — How threw more fuel on the fire whereby government expands FDR’s Economic Legacy Has by jawboning banks to lend a nation’s money supply and Damaged America.” It’s one of hundreds of billions of dollars thereby erodes the value of each the most illuminating works on for subprime mortgages. monetary unit — dollar, peso, the subject. It will help mightily pound, franc or whatever. It to correct the record and educate When the bubble burst, some of often shows up in the form of our fellow citizens about what the very culprits who promoted rising prices, which most people really happened in the 1930s. the policies that caused it confuse with the inflation itself. postured as our rescuers while The distinction is an important Another great addition to the endorsing new interventions, one because, as economist Percy literature, appearing in 2007, bigger government, more inflation Greaves explained so eloquently, is “The Forgotten Man: A New of money and credit and massive “Changing the definition changes History of the Great Depression” taxpayer bailouts of failing firms. the responsibility.” by . The fact that Many of them are also calling for it has been a New York Times higher taxes and tariffs, the very Define inflation as rising prices bestseller suggests there is a real nonsense that took a recession in and, like the clueless Jimmy for the truth about this 1930 and made it a long and deep Carter of the , you’ll think period of history. depression. that oil sheiks, credit cards Mackinac Center for Public Policy | Great Myths of the Great Depression 18 and private businesses are the fostering booms and busts. If it’s doomed Confederate money of culprits, and price controls are bad enough, it can even wipe out the . the answer. Define inflation in the very government responsible the classic fashion as an increase for it in the first place and then Today’s slow-motion dollar in the supply of money and lead to even worse afflictions. depreciation, with consumer credit, with rising prices as a Hitler and Napoleon both rose prices rising at persistent but consequence, and you then have to power in part because of the mere single-digit rates, is just to ask the revealing question, chaos of runaway . a limited version of the same “Who increases the money process. Government spends, supply?” Only one entity can do All this raises many issues runs deficits and pays some of that legally; all others are called economists have long debated: its bills through the inflation tax. “counterfeiters” and go to jail. Who or what should determine How long it can go on is a matter a nation’s supply of money? Why of speculation, but trillions in Nobel laureate Milton Friedman do governments so regularly national debt and politicians who argued indisputably that inflation mismanage it? What is the make misers of drunken sailors is always and everywhere a connection between fiscal and and get elected by promising monetary matter. Rising prices monetary policy? Suffice it to even more are not factors that no more cause inflation than wet say here that governments inflate should encourage us. streets cause rain. because their appetite for revenue exceeds their willingness to tax Inflation is very much with us but Before paper money, governments or their ability to borrow. British it must end someday. A currency’s inflated by diminishing value is not bottomless. Its precious-metal content of their was an influential charlatan erosion must cease either because coinage. The ancient prophet in many ways, but he nailed it government stops its reckless Isaiah reprimanded the Israelites when he wrote, “By a continuing printing or prints until it wrecks with these words: “Thy silver has process of inflation, governments the money. But surely, which way become dross, thy wine mixed can confiscate, secretly and it concludes will depend in large with water.” Roman emperors unobserved, an important part of measure on whether its victims repeatedly melted down the the wealth of their citizens.” come to understand what it is and silver denarius and added junk where it comes from. Meanwhile, metals until the denarius was So, you say, inflation is nasty our economy looks like a roller less than one percent silver. business but it’s just an isolated coaster because Congresses, The Saracens of Spain clipped phenomenon with the worst Presidents and the agencies the edges of their coins so they cases confined to obscure nooks they’ve empowered never cease could mint more until the coins and crannies like Zimbabwe. their monetary mischief. became too small to circulate. Not so. The late Frederick Leith- Prices rose as a mirror image of Ross, a famous authority on Are you tired of politicians the currency’s worth. international finance, observed: blaming each other, scrambling “Inflation is like sin; every to cover their behinds and score Rising prices are not the only government denounces it and political points in the midst of consequence of monetary and every government practices a crisis, and piling debts upon credit expansion. Inflation also it.” Even Americans have debts they audaciously label erodes and encourages witnessed that “stimulus packages”? Why do debt. It undermines confidence destroyed two — the so many Americans want to and deters investment. It ill-fated continental dollar of trust them with their health care, destabilizes the economy by the Revolutionary War and the education, and a host Mackinac Center for Public Policy | Great Myths of the Great Depression 19 of other aspects of their lives? It’s of government and how a Everyone has heard the sage madness writ large. The antidote free economy operates. Help observation of philosopher is the truth. We must learn the distribute copies of this essay George Santayana: “Those who lessons of our follies and resolve and other good publications cannot remember the past are to fix them now, not later. that promote liberty and free condemned to repeat it.” It’s enterprise. Demand that your a warning we should not fail To that end, I invite the reader representatives in government to heed. to join the education process. balance the budget, conform Support organizations like to the spirit and letter of the FEE and the Mackinac Center Constitution and stop trying that are working to inform to buy your vote with other citizens about the proper role people’s money.

A Final Word In 2004, two UCLA economists—Harold L. Cole and Lee E. Ohanian—coauthored a fascinating article in an important publication, the Journal of . It made this observation: the policies of President Franklin Roosevelt extended the Great Depression by seven long years. “The economy was poised for a beautiful recovery,” the authors show, “but that recovery was stalled by these misguided policies.” In a commentary on Cole and Ohanian’s research available at mises.org/story/1623, Loyola University economist Thomas DiLorenzo points out that six years after FDR took office, unemployment was almost six times the pre-Depression level. Per capita GDP, personal consumption expenditures and net private investment were all lower in 1939 than they were in 1929. “The fact that it has taken ‘mainstream’ neoclassical economists so long to recognize this fact” (that FDR’s policies exacerbated the disaster), notes DiLorenzo, “is truly astounding” but still “better late than never.” Slowly but surely, the truth is getting out.

About the Author

Lawrence W. Reed is president of the Foundation for Economic Education (FEE), founded in 1946 and headquartered in Irvington, N.Y., and president emeritus of the Mackinac Center for Public Policy in Midland, Mich. Prior to assuming the FEE presidency in September 2008, he led the Mackinac Center for 20 years. Reed is author of more than 1,000 columns and articles that have appeared in publications all around the world, including , Investor’s Business Daily, The Detroit News, USA Today, and the Christian Science Monitor. He has visited 70 countries and delivered speeches in many of them, including his well-known “Seven Principles of Sound Policy” at People’s University in Beijing, China. He is a past president and a 15-year board member of the State Policy Network. He chaired the board of trustees of the Foundation for Economic Education in the 1990s and has authored nearly 200 articles in FEE’s journal, , since 1977. More information about the author and the two organizations sponsoring this publication can be found at www.fee.org and www.mackinac.org. Mackinac Center for Public Policy | Great Myths of the Great Depression 20

Endnotes 1928-1938 (Boston: Houghton Mifflin Page 2, Federal Reserve Building, Library Company, 1959), p. 70. of Congress, Prints and Photographs 1 Alan Reynolds, “What Do We Know 22 Anderson, p. 315. Division, Theodor Horydczak Collection About the Great Crash?” National [LC-H814-T-F03-003 DLC]. 23 “FDR’s Disputed Legacy,” p. 24. Review, November 9, 1979, p. 1416. Page 3, Unemployment, Michigan State 2 Hans F. Sennholz, “The Great 24 Anderson, p. 336. Archives. Depression,” The Freeman, April 1975, p. 25 Ibid., pp. 332-334. Page 5, Farm Relief Act, Library of 205. 26 “FDR’s Disputed Legacy,” p. 30. Congress, National Photo Company 3 Murray Rothbard, America’s Great 27 John T. Flynn, The Roosevelt Myth Collection, [LC-USZ62-111718 DLC]. Depression (Kansas City: Sheed and (Garden City, N.Y.: Garden City Page 6, Roosevelt, , Ward, Inc., 1975), p. 89. Publishing Co., Inc., 1949), p. 45. Prints and Photographs Division [LC- 4 Benjamin M. Anderson, Economics and 28 C. David Tompkins, Senator Arthur H. USZ62-117121 DLC]. the Public Welfare: A Financial and Vandenberg: The Evolution of a Modern Page 7, Roosevelt, Franklin D. Roosevelt Economic History of the United States, Republican, 1884-1945 (East Lansing, Library and Museum. 1914-46, 2nd edition (: MI: Michigan State University Press, Liberty Press, 1979), p. 127. Page 9, Bridge, Library of Congress, 1970), p. 157. Prints and Photographs Division, 5 Milton Friedman and Anna Jacobson 29 Ibid., p. 121. Historic American Buildings Survey or Schwartz, A Monetary History of the Historic American Engineering Record, United States, 1867-1960 (New York: 30 Albert J. Nock, Our Enemy, the State (online at www.barefootsworld.net/ Number [HAER, TEX,42- National Bureau of Economic Research, VOS.V,4-]. 1963; ninth paperback printing by nockoets1.html), Chapter 1, Section IV. Press, 1993), pp. 31 Martin Morse Wooster, “Bring Back the Page 11, Steel Mill, Library of Congress, 411-415. WPA? It Also Had A Seamy Side,” Wall Prints and Photographs Division, Street Journal, September 3, 1986, p. Theodor Horydczak Collection [LC- 6 Lindley H. Clark, Jr., “After the Fall,” The H814-T-0601 DLC]. Wall Street Journal, October 26, 1979, p. A26. 18. 32 Ibid. Page 12, Supreme Court Building, Library of Congress, Prints & Photographs 33 Johnson, p. 762. 7 “Tearful Memories That Just Won’t Division, FSA-OWI Collection, [LC- Fade Away,” U. S. News & World Report, 34 Sennholz, pp. 212-213. USF34-005615-E DLC]. , 1979, pp. 36-37. 35 William E. Leuchtenburg, Franklin D. Page 13, Strikers, Archives of Labor and 8 “FDR’s Disputed Legacy,” Time, February Roosevelt and the New Deal, 1932-1940 Urban Affairs, Wayne State University. 1, 1982, p. 23. (New York: Harper and Row, 1963), p. 9 Barry W. Poulson, Economic History of 242. the United States (New York: Macmillan 36 Ibid., pp. 183-184. Publishing Co., Inc., 1981), p. 508. 37 Robert Higgs, “Regime Uncertainty: 10 Reynolds, p. 1419. Why the Great Depression Lasted So 11 Richard M. Ebeling, “Monetary Central Long and Why Prosperity Resumed Planning and the State-Part XI: The After the War,” The Independent Review, Great Depression and the Crisis of Volume I, Number 4: Spring 1997, p. Government Intervention,” Freedom 573. Daily (Fairfax, Virginia: The Future of 38 Gary Dean Best, The Critical Press Freedom Foundation, November 1997), and the New Deal: The Press Versus p. 15. Presidential Power, 1933-1938 12 Paul Johnson, A History of the American (Westport, Connecticut: Praeger People (New York: HarperCollins Publishers, 1993), p. 130. Publishers, 1997), p. 740. 39 Ibid., p. 136. 13 Ibid., p. 741. 40 Burton Folsom, “What’s Wrong 14 Larry Schweikart and Michael Allen, With Income Tax?”, A Patriot’s History of the United States: Viewpoint on Public Issues, No. 99-18, From Columbus’s Great Discovery to May 3, 1999, Mackinac Center for Public the War on Terror (New York: Sentinel, Policy, Midland, Michigan. 2004), p. 553. 41 Ibid. 15 Ibid., p. 554. 42 Higgs, p. 564. 16 “FDR’s Disputed Legacy,” p. 24. 43 Quoted in Herman E. Krooss, Executive 17 Sennholz, p. 210. Opinion: What Business Leaders Said 18 From The Liberal Tradition: A Free and Thought on Economic Issues, People and a Free Economy by Lewis 1920s-1960s (Garden City, N.Y.: W. Douglas, as quoted in “Monetary Doubleday and Co., 1970), p. 200. Central Planning and the State, Part 44 Higgs, p. 577. XIV: The New Deal and Its Critics,” by 45 Blum, pp. 24-25. Richard M. Ebeling in Freedom Daily, February 1998, p. 12. 19 Friedman and Schwartz, p. 330. Photo 20 Jim Powell, FDR’s Folly: How Roosevelt Cover, Artwork based on a poster created and His New Deal Prolonged the Great by Works Progress Administration Depression (New York: Crown Forum, between 1941 and 1943. 2003), p. 32. Page 1, Library of Congress, Prints and 21 , From the Photographs Division, [LC-USF34-T01- Morgenthau Diaries: Years of Crisis, 018258-C DLC]. Mackinac Center for Public Policy | Great Myths of the Great Depression 21

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About the Foundation for Economic Education

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