Book Review: The Politically Incorrect Guide to the Great Depression and the New Deal

Copyright 2009 by Robert Murphy, Regnery, Washington D.C.

Schoonmaker veegt de vloer na de beurskrach va...

Schoonmaker veegt de vloer na de beurskrach van 1929 / Cleaner sweeping the floor after the Wall Street crash, 1929 (Photo credit: Nationaal Archief)

Often times, politics and economics go hand in hand.  In the Case of the Great Depression, and Roosevelt’s feeble attempts to get us out of it, this is most certainly true.  Because of the widespread desperation of the times, which forced the vast majority of uneducated people to rely almost totally on government, and because Roosevelt became entrenched in the white house for more than a decade, the cult of Roosevelt has emerged in which he attains God-like status.  However, nothing could be further from the truth.  A closer examination of the 20’s and 30’s  leads us to understand that, without Roosevelt, Hoover and the Fed, the Great Depression might never even have happened, or, at worst, would have been little more than a bump in the road to prosperity.

Murphy exposes four great myths that have arisen from the Depression Era:

1. Wild stock market speculation was the cause of the 1929 Crash and the subsequent Depression.

2. Herbert Hoover did nothing to attempt to stimulate recovery after the crash.

3. Roosevelt used public works stimulus and massive government programs to end the Depression.

4. WWII got us out of the depression.

1.  Yes, stocks were bought on margin.  And, yes, banks lent a lot of money to those who bought on margin.  And many stock speculators lost their shirts in the Crash.  There is no doubt that life after the crash was painful.  However, before we blame banks and speculators for their greed, we have to understand that the Fed, that ubiquitous federalized central banking group, encouraged a boom-bust cycle of economics by its manipulation of money.  (There is a story here about the protections that were removed by taking the world off the gold standard as well, which should not be overlooked in one’s understanding of how the Fed can do the stupid things it does.)  First, in the 20’s, the Fed increased the money supply and eased credit, which enable not only more stock speculation, but also encouraged a flurry of borrowing for business expansion.  Once people were over-committed financially, suddenly the Fed was afraid that the economic freight train was about to jump the tracks,  so they suddenly put on the brakes, tightening the money supply and raising interest rates.  (They were influenced by foreign markets to a great degree, preferring to throw Americans under the bus instead of watching the British pound tank.  Makes you wonder about their loyalties, doesn’t it?)  The resultant squeeze on investors put the squeeze on local banks, which started failing rapidly as people made desperate runs on them, trying to get their savings out before they closed.  So, it’s fair to say that the crash was caused, not by capitalist ideals, but by reckless manipulation of the Fed.

2. Herbert Hoover was the George W. Bush of his day.  Both inherited healthy budgets that they managed to turn into big-government debacles by the time they exited.  When Hoover took office from Calvin Coolidge, the nation was enjoying the greatest prosperity of its history.  Taxes were low, spending was lower, and surpluses were the order of the day.  Wilson’s presidency left behind a $25 Billion deficit.  In his six years in office, Coolidge managed to pay down the debt by almost $9 billion.  (That seems like small potatoes to us today.  But, since the budget now is almost 1000 times the budget in the 20’s, in today’s terms, Coolidge would have managed to pay almost $9 Trillion of the national debt!  So, as we talk figures here, think times 1000, and you will get an idea of the magnitude of Coolidge’s accomplishment.)  He left Hoover with a budget of $3 Billion and a surplus of $750 million.

After the Crash, Hoover got right to work on stimulus packages.  First of all, as production fell and prices deflated, he forbade businesses to deflate wages.  The result of this was massive unemployment, as businesses could not longer afford to hire workers as prices and revenues dropped.  (Can you say “minimum wage”?)  Secondly, has passed the Smoot-Hawley Tariff Act, which placed crippling tariffs on foreign supplies that were necessary to create American-made products.  It also devastated foreign demand for American-made exports.  Thirdly, he raised taxes back to pre-Coolidge levels, which, as the Laffer Curve would later predict,  actually decreased government revenues.  Despite this, Hoover more than doubled the budget, running a deficit of nearly 50% (that would be $3 trillion in today’s terms, far greater than Bush or even Obama.)  Fourth, he created his own “New Deal”, although on a smaller scale than his successor.  By the time Hoover left office, he had helped create the worst economic downturn the United States had ever seen.

3. Roosevelt’s answer to the depression was to see Hoover’s failure in not doing enough.  So, Roosevelt created a lot of the massive bureaucracy that we have today.  But his draconian socialist moves caused most business investors to fear that any move they might make to correct the economy would be taken over by the government, causing them to lose their wealth and the flexibility necessary to create economic solutions.  Consequently, most private investment dried up entirely.  At the same time, government programs siphoned the most employable people from the private work force, making it impossible to reduce unemployment.

Roosevelt’s public works programs tended to only benefit areas where the outcomes of elections were in doubt.  Staunchly Republican or Democratic ares were bypassed in favor of swing districts.  As such, the public works programs became an expensive, taxpayer-funded vote-buying scheme.  In the end, they did little in the way of national easing of unemployment.

Unemployment did steadily drop to less then 15% by 1937, only to jump again in 1938.  The only thing that brought unemployment to single digits again was the employment of nearly ten million men in the armed services during WWII.

4. WWII did get production moving again in the US.  But, it wasn’t the war, per se, that got us out of the depression.  Anyone who live through the war (like my parents) knows that the country suffered from huge shortages of domestic goods as production was diverted to the war effort.  What changed is that Roosevelt now had to enlist the aid of manufacturers to execute the war.  Instead of working against business, he now had to encourage their leadership in the war economy by promising to pay them for production.  Once the private sector was again given power over production and innovation for constructing the war machine, factories began to hum again.  Still, domestic austerity continued until after the war.

Beginning with the end of the war, private enterprise had to figure out how to convert from lucrative war contracts back to civilian enterprises.  As this changeover accelerated into the 1950’s, the private sector was once again free to expand, innovate and prosper.  It was free enterprise, then, which finally brought us out of the depression.  Since Roosevelt was long dead by then, one cannot give him the credit.

Dr. Murphy’s book, part of the P.I.G. (Politically Incorrect Guide) series, is a rather concise read.  Yet is manages to encapsulate all the relevant issues from one of the most influential periods of American history.  And it makes it quite clear that history is repeating itself on an even larger scale today.  It’s a must-read for anyone who still can’t figure out why our economy is in so much trouble today.  It’s a must-read also for those who see any sort of a turn-around as validation for massive government control and unending stimulus.  After four years of  Roosevelt, there was a little bump of hope, too.  But that quickly vanished into a quagmire that lasted for another decade.  It will hurt to let the bottom fall out.  But it would hurt much less to hit bottom and start the road to recovery than it will to be kept dangling over the abyss for another decade only to end up falling into it with no possibility of climbing out again.


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