The Great Depression is often cited as one of the great failures of the free market. The conventional wisdom is that President Herbert Hoover was a backwards free-market loving idiot that stuck to his guns and didn’t intervene in the economy when the Great Depression began, which is why the Great Depression got so bad. Then his successor, Franklin Delano Roosevelt (FDR), took charge and got the U.S. out of the Great Depression by wise government intervention. This is, once again, not true. Government intervention caused the Great Depression and it greatly lengthened the depression’s hold on the economy.
The Cause of the Great Depression
The idea that the Great Depression was a failure of the free-market is wrong from the start. Government intervention causes all depressions, recessions, or busts in the economy. This is because they artificially lower interest rates. This topic is deserving of its’ own article, so to see the evidence for this claim click here. Knowing that government causes all depressions (including the Great Depression), we can move on to the main topic of this article.
Herbert Hoover’s Role
To start, let’s consider Herbert Hoover’s role in the Great Depression. He was definitely not a follower of the free-market. His many interventionist policies clearly show this. He introduced a high minimum wages policy, a high tariff on 25,000 goods, a large tax increase, and a massive increase in public works programs.
Herbert Hoover’s high wage policy strongly encouraged businesses to keep their wages high even though it was a time of economic depression. Supposedly, the average person was able to buy more stuff because of the higher wages. But in reality, many people ended up having no wage because of this policy. Businesses had a much harder time keeping people employed because of the high wages; they couldn’t afford to keep as many people employed. So the high wages policy exacerbated the high unemployment of the great depression.
Hoover introduced the Smoot-Hawley Tariff, which raised the tariffs on 25,000 goods by an average of 59%. As a result, American consumers bought way fewer foreign products because of the massive tax rate. Foreign countries, unhappy because Americans were buying way less of their products, began to institute high tariffs on American products in retaliation. Thus, making the populations there buy way less of American products. This hurt the American car industry and many other export industries; their sales went way down.
In Hoover’s Revenue Act of 1932 taxes were raised significantly. The top marginal tax rate increased from 25% to 63%. Taxes were introduced or raised on corporations, estates, gifts, cars, tires, gasoline, toiletries, electric energy, luxury items, bank checks, and telephone and telegraph messages. Do you think all of these tax increases made it easier for the average person to make a living? All it did was prolong the depression.
Lastly, Hoover also had a very extensive public works program. More money was expended on public works in 4 years than in the previous 20. Hoover created massive deficits to finance all of these programs. One industry they decided to subsidize was shipbuilding. However, during this time international shipping was suffering a decline because of the Smoot-Hawley Tariff. It is ironic, the one time that government decides to subsidize shipbuilding is when it is needed the least.
Does Herbert Hoover sound like a believer in the free-market now? He introduced many interventionist policies that go directly against the free-market. It is true that Herbert Hoover worsened the Great Depression. However, it was only because of his interventionist policies that this happened. If he had stepped back and done nothing, then the great depression would have ended much sooner.
Franklin Delano Roosevelt’s Role
Franklin Delano Roosevelt (FDR), Herbert Hoover’s successor, definitely did not save the U.S. from the Great Depression. He created the New Deal, a set of laws and policies. It expanded upon Hoover’s bad interventionist policies and codified many into law. It created many institutions and agencies that restricted the free-market, thus slowing economic recovery.
The National Recovery Administration
The New Deal created the National Recovery Administration (NRA). The NRA allowed each industry to draft a production code for itself. The enforcement of these production codes was the job of the NRA. All businesses were required to follow this code regardless of their size. This code included: minimum prices, minimum wages, hours of production, and production methods. Guess who had the most influence in the drafting of the production codes? It was the largest businesses. So, naturally they made the production codes suit their needs at the expense of all other businesses.
In 1934 Clarence Darrow did an investigation into the NRA. He concluded: “In virtually all the codes we have examined, one condition has been persistent… the code has offered an opportunity for the more powerful… interests to seize control of an industry or to augment and extend a control already obtained”
Small/medium businesses had a much harder time competing with larger companies. They no longer could compete on price, they were forced to buy specific (often expensive) equipment, they could only have limited hours of operation, and wages were artificially high. A tailor could be arrested for the crime of stitching together a pair of pants in the middle of the night. Does that really sound like a crime? These uncompetitive, restrictionist codes made it harder for businesses to operate, thus slowing the recovery of the Great Depression.
William Leuchtenburg (a pro-New Deal historian) says: “the NRA did little to speed recovery, and probably actually hindered it by its support of restrictionism and price raising.”
The Agricultural Adjustment Act
Another creation of the New Deal was the Agricultural Adjustment Act. Its purpose was to combat the decreasing prices in crops to help farmers. The government believed that farmers were not making enough money to make a good living. To accomplish their goal of raising crop prices, they decided they should decrease the crop yield. (When something becomes more scarce, the price of that thing goes up.)
To reduce the total amount of crops for the current year, the government had farmers destroy their crops. Lots of cotton, wheat, pigs, etc. were all burned or slaughtered. To reduce crop yields for the following year, they created an acreage limit. It was illegal for farmers to plant more that a certain number of acres per year. Meanwhile, the U.S. population was starving because they couldn’t get enough food. This is obviously a terrible time for the government to force the destruction of food and farmland; the American people were starving.
The Works Progress Administration
The New Deal also created the Works Progress Administration (WPA). The WPA was in charge of public works. Much like Hoover, FDR sunk a lot of money into public works programs. One oddity in FDR’s programs was that the south, where people were poorest, received the least WPA assistance. Most of the WPA projects were in the western states. It also so happens that in 1932 FDR’s electoral margin had been thin in the west.
The connection between these 2 events is obvious. In an effort to secure his reelection, FDR gave more aid to the west. That way they would like him more. He knew that the south would vote for him because they had always voted democrat since the Reconstruction. FDR used the WPA to secure his reelection, instead of sending the aid where it was needed. Not to mention, this also kept the federal deficit up.
What Ended the Great Depression
Is government spending the way to end depressions? No it is not. If government spending really was the cure to the Great Depression, why is it that 1946, when the government drastically cut down on its’ budget after WWII, was the single greatest year for the private economy in all of American history. In 1946, the government disbanded the army, closed munitions factories, stopped building ships, and removed all economic controls. This allowed the economy to function naturally again, which is what allowed the country to come out of the Great Depression. If government spending really was the solution, then why didn’t the economy collapse in 1946?
(Contrary to popular belief WWII did not end the Great Depression. Wars do not create prosperity; they can only destroy. To learn the details of how war harms an economy click here.)
Throughout the Great depression there was a lot of government intervention into the economy. This created a hostile environment for businesses and investors to start the ventures necessary to bring the U.S. out of the Great Depression. American historian and economist Robert Higgs says: “Given the unparalleled outpouring of business-threatening laws, regulations, and court decisions, the oft-stated hostility of President Roosevelt and his lieutenants toward investors as a class, and the character of the antibusiness zealots who composed the strategists and administrators of the New Deal from 1935 to 1941, the political climate could hardly have failed to discourage some investors from making fresh long-term commitments.”
Conclusion
The Great Depression was not a failure of the free-market, but rather a failure of government action. Herbert Hoover was not a believer in the free-market and his policies clearly show this. FDR only extended the Great Depression by continuing Hoover’s bad policies to a greater degree. Government intervention only slows the recovery process by meddling with the free-market.
This is very interesting. Nice job.