In almost every scholarly discourse concerning the origins and eventual cause of the Great Depression; it is implied that the recession was a result of the runaway excess and instability of capitalism. Traditional wisdom in American History Books asserts that the go-go 20’s aided by the lassiz-faire non-interventionist policies of Herbert Hoover assisted and then accelerated the process of economic decline. Most intellectuals then argue that the unprecedented state interventionist and regulatory initiatives spearheaded by F.D.R quote “saved capitalism from itself”.
It is my purpose in this essay to show that contrary to popular belief, Hoover’s administration was one of the most interventionist in American History, and that its policies were among the principal causes of the Great Depression. I also intend to show that legislation enacted by the US government after the stock market crash exacerbated the recession. (Smoot-Hawley Tariff, Federal Farm Board). I will provide evidence that F.D.R’s state regulatory schemes and initiatives were actually economically harmful and lengthened the depression. Finally I intend to show that real economic recovery did not occur until after WWII, when reduced government spending and the elimination of new-deal legislation spurred economic recovery.
Herbert Hoover was a hyper-interventionist who sought to rigidly regulate the functioning of the American Economy. As commerce secretary he increased his own budget by more than 50 percent, expanded the commerce department into thirty divisions, and hired more than three thousand additional government bureaucrats. While Commerce Secretary and then as President he advocated legislation that included.
1. Government enforced wage controls (propping up wages to increase purchasing power.
2. The Railway Labor Act- The first law to interfere with private labor relations.
3. Providing “Easy Credit” government enforced initiatives on lending.
4. High Protectionist Tariffs including the notorious Smoot Hawley act.
5.Government Cartels controlling specific Industries- Limited Broadcast Licenses to regulate radio. The Bureau of Aeronautics to regulate civilian aviation.
6.“Work Sharing” or limiting hours worked to spread employment (while conversely creating more unemployment).
7.500 Million Dollars in Public Works spending or approximately 13% of the Federal Budget in 1931.
8.The Revenue Act of 1931- A massive tax hike in the midst of recession.
9.The Norris-LaGuardia act – Union protection Legislation.
10.The Federal Farm Board – A Government agricultural cartel used to artificially prop up prices.
Hoovers attempts to regulate Agriculture were pervasive and harmful. In 1929 the Agricultural marketing Act was passed. This created a Federal Farm Board that sought to control farm surpluses and bolster prices. It essentially created a legal cartel that would artificially “fix” prices. Ironically the major heads of almost every agricultural corporation served as administrators on this board. Predictably they used this power to drive up consumer prices while using the government as an enforcer to stifle free-market competition.
Amazingly while starvation and grinding poverty plagued Americans, The FFB purchased surplus wheat from farmers to “drive up prices”. When farmers continued producing agricultural products en masse the FFB concluded that “Overproduction was driving prices down”. The next step was to begin paying farmers not to farm. By 1931 the Federal government had purchased 67 million bushels of wheat that it was keeping off the market.
Eventually the FFB would insist that land be withdrawn from cultivation, surplus crops be destroyed and livestock be slaughtered in order to maintain artificial price ceilings. F.D.R continued and expanded these policies, burning crops, subsidizing farmers not to farm and enforcing arbitrary price ceilings. The result was predictable, chronic food shortages, exorbitant prices, inflation, conspicuous waste, and increased unemployment in the agricultural sector.
Perhaps the single most harmful piece of legislation enacted by Hoover was the Smoot-Hawley tariff of March 1930. This intrusive tax instituted 60% tariffs on over 800 products. Several countries immediately retaliated with equally reactionary tariffs on American products. By 1933 global trade had been reduced almost 83 percent, from 3 billion dollars a month in 1929 to half a billion a month by 1933. The United States suffered the worst with a 53 percent reduction in exports from 1929 to 1933.
The international ramifications were catastrophic. The tariff exacerbated the effects of depression on global economies and heightened political instability around the world. With little or no demand for exports more workers were laid off. In Germany, the Tariff precipitated complete economic collapse, runaway inflation, massive unemployment and greatly aided the instability that enabled the Nazis to seize power. Data from the US Department of Commerce substantiates the devastating effect the tariff (along with other schemes) had on unemployment. In 1930 the unemployment rate stood at 8.7 percent, by 1933 it had skyrocketed to 25% the highest in American History.13 By 1931 The Federal Deficit stood at 2 billion. Clearly Hoover’s regulatory initiatives stifled growth and made the recession worse.
In 1933 F.D.R came to power promising radical social change and economic recovery in the form of the First New Deal (1933-1938). It is commonly asserted that the policies and programs that F.D.R instituted, contributed to the alleviation of unemployment and the gradual restoration of prosperity in the United States. A closer look however reveals that unemployment was extraordinarily high during the great depression, and did not substantially improve during the first or second Deal. In fact unemployment was higher in 1938(19.0) than in 1931(15.9).Unemployment did not substantially improve until millions of men were sent overseas to war, a fate far worse than being out of work.
The Gross National Product lagged behind the 1929 level until 1940. Eventually arms exports and manufacturing did significantly increase the GDP. However this is not a validation of New Deal economic policies. Many countries briefly benefited economically from massive arms build ups and manufacturing. These included Nazi Germany and the Soviet Union. Like the United States they also succeeded in building innumerable tanks; ships, guns, ammunition and aircraft while providing their citizens with temporary work in wartime industries. Personal consumption data shows a similar story. Consumer spending was approximately 8 % lower in 1938 than in 1929 that’s without considering shortages as a result of government price controls
Temin, in “The Spoils of War” argues that it was government interference and mismanagement in the maintenance of the gold standard that primarily contributed to the depth of the depression. He states that after World War I financial policies contributed to “Great strain in the operation of the interwar gold standard, the asymmetry forced countries lacking reserves to contract more than reserve rich companies expanded". The result was a "deflationary monetary policy during the 1920's and 30's".
An interesting microcosm of Temin’s conclusion is F.D.R’s gold standard policy during the new deal. In 1934 FDR nationalized the gold stock by making the private ownership of gold illegal and nullified all contractual promises to pay for anything in gold. F.D.R hoped that the measure would inflate prices, but instead it greatly assisted in deflation. This is indicated by the stagnant and or declining personal consumption data that was common throughout the 1930's, The combination of arbitrary price ceilings and deflationary monetary policy clearly had a devastating effect on average Americans during the Depression.
Perhaps the most bizarre, misguided and harmful legislation enacted by F.D.R was the so called N.R.A or national recovery administration. This act organized each industry into a federally supervised trade association called a “code authority”. These “codes” then determined production, prices, and distribution methods all according to government policy. Each code was essentially a government backed monopoly headed by an unholy alliance of businessmen and government bureaucrats. Just like with Hoover’s FFB, the codes used government coercion to prop up prices to the detriment of consumers while prosecuting free-market competition. The AAA or agricultural adjustment act was essentially a continuation of the bewildering and wasteful policies of Hoover’s Federal Farm Board.
Eventually the First New Deal became such a debacle that in 1935 the NRA and AAA were declared unconstitutional by the U.S Supreme Court. In 1934 a senate commission headed by attorney Clarence Darrow described the NRA as “Harmful, monopolistic, oppressive, grotesque. Invasive, fictitious, ghastly, anomalous, preposterous, irresponsible, savage, wolfish”. The government “make-work” programs like the Works Progress Administration and the Civilian Conservation were also a complete disaster. In fact FDR advisor Harry Hopkins told the president in 1935 that “I’ve got four million at work (in federal jobs), but for gods sake don’t ask me what they are doing”. These “make work” policies led to greater government spending and temporary employment but did not help alleviate the great depression. This is indicated by the economic data concerning GDP, Personal consumption and unemployment which show decreased personal spending, a stagnant GDP and high unemployment.
Many economist’s and historians argue that the New Deal was essentially modeled after fascist and planned economic systems in Europe and Russia. In fact, Rexford G. Tugwell, F.DR.’s principal economic advisor was a great admirer of Soviet Russia’s central economic planning system. The New Deal government cartels closely mirrored the systems then in place in Nazi Germany and Fascist Italy. Under these arrangements business and government colluded to create legal monopolies that fixed prices, regulated labor and eliminated competition. These schemes were clearly harmful and distinctly un-American. Given these disturbing correlations, it is amazing that generations of American intellectuals have maintained that these oppressive measures helped “alleviate” the Depression.
Even if these points are true many New Deal apologists maintain that at least the New Deal was an attempt at an altruistic social experiment that attempted to help the neediest in American Society. An economic study conducted by renowned economists Jim F Couch and William H Shugart directly contradicts this assertion. In the “Political Economy of the New Deal” Couch and Shugart conclusively show through economic data that the hardest hit sections of the country (the south) received proportionately less aid than better off areas. In addition New Deal largess was doled out in a greater percentage to constituencies that supported F.D.R and the Democratic Party. They eventually conclude that New deal social legislation was nothing more than pork barrel politics used to coerce support for the Democratic Party and New-Deal legislation.
The most damning indictment of these policies is the economic data after World War II. The Data shows that personal income substantially increased after WW2 as a result of decreased taxes and government spending. It is true that personal income did increase during World War II and even surpassed the 1929 level. But temporary wartime employment and production is not a true indicator of economic prosperity. An analysis of peacetime economic data is a more reliable indicator of economic well being. The GDP data reveals a similar story. In 1938 at the height of the “Roosevelt recession” the GDP was almost 20 points lower than in 1929.23 By 1950 the GDP was almost 3 times the 1938 level! Roosevelt apologists will argue that this was a result of New Deal legislation. The real explanation is that the massive reduction in government spending after 1945 sparked investment, personal savings and economic recovery.
In conclusion I believe that the Great Depression was a result of misguided fiscal and trade policies implemented by quasi-socialist and fascist governments in The United States and Europe. The combination of fluctuations in the value and maintenance of the gold standard, massive government spending, and reactionary government intervention in the free market and protectionist tariffs caused the Great Depression and lengthened its effects.
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