The "Great Depression" began with the stock market crash of 1929. In all previous depressions, there was little, if any, federal government intervention to extricate America from economic travail. It was held that the federal government possessed neither the knowledge nor the constitutional authority to meddle with the free-market capitalist economy that had propelled America from a fledgling agricultural enclave to a global industrial power in less than 150 years.
Everything was about to change. The 1920s experienced at once the reckless expansion of credit by the Federal Reserve and economic thought by the liberal elite. The former produced an enormous margin-driven stock market bubble that burst in October 1929; the latter produced a remedy that burst any chance of recovery from economic distress. Unlike all previous economic downturns, the calamity in 1929 invoked intense federal government intervention; it also invoked the longest depression in American history. The days of limited government — so expressively and resolutely defined by the Constitution — would be gone for good.
Then-president Herbert Hoover transformed the ensuing mild recession (from which the economy was already recovering by June 1930) into a depression, which, in 1932, was delivered to newly elected president Franklin Delano Roosevelt. With his Brain Trust of lawyers, journalists, and college professors and the freshly minted ideas of Keynesian scholars, he concocted an unprecedented grab-bag of nostrums known as the "New Deal" and parlayed Hoover's depression into a prolonged Great Depression. The American economy would not return to its pre-crash prosperity until 1946.
Unlike all previous economic downturns, the calamity in 1929 invoked intense federal government intervention; it also invoked the longest depression in American history.
In fairness, the bungling of both presidents was enhanced by the Federal Reserve System. The primary function of the Fed was to ensure that US banks could withstand "runs" by depositors attempting, en masse, to withdraw their assets during financial downturns. The Fed was established in 1913 to act as the lender of last resort (LLR) for banks. It replaced the private clearinghouse system that had successfully provided LLR services prior to 1913. But between 1930 and 1933, when stressed banks were desperate for liquidity, the Fed followed a tight money policy. This inexplicable neglect of its primary function contributed to the collapse of more than10,000 banks between 1930 and 1933. Then, in 1936 and 1937, its insistence on raising bank-reserve requirements (once again shrinking the money supply), contributed to the severe recession of 1937–38 — the recession within the Depression.
Unlike President Harding, who did not intervene in the depression of 1920, Hoover believed that not intervening in 1929 "would have been utter ruin." Accordingly, he increased federal spending 42% by 1932, boasting that his administration had embarked on "the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic." Hoover was then excoriated by FDR for extravagant spending and excessive taxing, for entertaining the idea that "that we ought to center control of everything in Washington as rapidly as possible,” and for “leading the country down the path of socialism.”
FDR's public objection to Hoover's intervention was, however, merely a ploy to win the election of 1932. Privately, he believed that Hoover's most gigantic program was not gigantic enough. Roosevelt’s New Deal would put Hoover's reckless extravagance to shame. And while Hoover's intervention was to be temporary and limited, FDR's would become permanent and unlimited. FDR radically transformed government's role in the economy to "center control of everything in Washington as rapidly as possible" and "lead the country down the path of socialism."
By all accounts, the intentions of the New Deal were noble and praiseworthy. To an objective observer, little else can be said that is favorable. Although Democrats hail the welfare and regulatory state that FDR created, the establishment of a welfare and regulatory state was not a New Deal objective. Its objective was economic recovery — which was never achieved under New Deal programs. Unable to restore the American economy, the charismatic FDR gave only ironic hope to a nation in despair: the hope that it could endure the seemingly endless hardship that his policies inflicted.
Hoover believed that not intervening in 1929 "would have been utter ruin." Accordingly, he increased federal spending 42% by 1932.
If not for World War II, FDR's intervention "would have been utter ruin" for the nation. As economist Larry Summers, former director of President Obama's National Economic Council, admonished: “Never forget, never forget, and I think it’s very important for Democrats especially to remember this, that if Hitler had not come along, Franklin Roosevelt would have left office in 1941 with an unemployment rate in excess of 15% and an economic recovery strategy that had basically failed.”
The New Deal was the paragon of nostrums: a political fantasy whose probability of success was inversely proportional to the conceit of its exaggerated claims. Blaming both capitalism and his predecessor for the nation's economic plight, FDR felt compelled to rely on untested Keynesian concepts for stimulating the economy. What emerged was a haphazard torrent of elixirs, boondoggles, and utopian schemes ("a saturnalia of expropriation and waste," to H.L. Mencken) whose only centering force was a frenetic shove to expand federal power. Brain Trust professor Raymond Moley, a close FDR advisor who eventually became critical of the New Deal, found FDR a rank amateur in such matters. Said Moley in 1939, “To look upon these programs as the result of a unified plan, was to believe that the accumulation of stuffed snakes, baseball pictures, school flags, old tennis shoes, carpenter’s tools, geometry books, and chemistry sets in a boy’s bedroom could have been put there by an interior decorator.”
Brain Trust professor Alvin Hansen (aka the "American Keynes"), who favored "highly centralized collectivism" as the optimal method to "command and direct the productive resources," also became frustrated. According to Hansen, "Every attempt at a solution involves it in a maze of contradictions. Every artificial stimulant saps its inner strength. Every new measure conjures out of the ground a hundred new problems."
FDR set the precedent for government by nostrum, and demonstrated that the only thing worse than a liberal nostrum is a well-funded liberal nostrum. Said FDR's Treasury Secretary Henry Morgenthau: "We are spending more than we have ever spent before and it does not work. I say after eight years of this administration we have just as much unemployment as when we started . . . And an enormous debt to boot!"
The charismatic Roosevelt gave only ironic hope to a nation in despair: the hope that it could endure the seemingly endless hardship that his policies inflicted.
The spending continued until after WWII. Keynesian economists such as Hansen were beside themselves with fear that postwar budget cuts would drastically harm the New Deal goal of pre-crash prosperity. If the spending did not continue, warned Paul Samuelson, America would experience “the greatest period of unemployment and industrial dislocation which any economy has ever faced.”
To their intellectual dismay, once tax rates were cut and price controls removed, the private sector (i.e., capitalism) took over, and the American economy soared. According to economist Steven Moore, "personal consumption grew by 6.2% in 1945 and 12.4% in 1946 even as government spending crashed. At the same time, private investment spending grew by 28.6% and 139.6%." Unemployment dropped to 4% in 1946 and "stayed that low for the better part of a decade . . . during the biggest reduction in government spending in American history."
The Great Depression finally ended, when the spending finally stopped. It was not the New Deal that ended the depression. Nor was it WWII. It was the curtailment of the New Deal that ended the depression, 17 years after it started.
What has America learned from this tragic ordeal? Libertarians and conservatives have learned that there is no better argument for limited government than the New Deal. Prior to 1929, the federal government did not intervene in times of economic distress. Recovery was left to the forces of capitalism; individuals and businesses were left to fend for themselves, receiving relief primarily from private charities, occasionally from state and local governments. During that long history, the federal government nostrum was peddled only by snake-oil salesmen, and recovery from economic downturns averaged four years. It often occurred in two years or less. Capitalism did not produce depressions, and less intrusive means of intervention, including no federal intervention, produced far superior results.
After the Panic of 1893, President Grover Cleveland did virtually nothing, except to arrange the repeal of interventionist laws; the ensuing depression, which, according to many, was every bit as devastating as the Great Depression, ended in about four years. (On the contrast between the two depressions, see an essay by Stephen Cox in Edward Younkins, Capitalism and Commerce in Imaginative Literature.) After the Crash of 1920, in which the stock market fell further than it would in 1929, President Harding did less than nothing interventionist. He cut taxes for all income groups, cut the federal budget by almost 50%, and reduced the national debt by 33%. The ensuing depression ended in less than two years and was followed by eight years of unprecedented prosperity, the "Roaring Twenties." Harding succeeded where FDR failed. "Wobbly" Warren Harding!
From this evidence, libertarians and conservatives conclude that nostrums should be avoided at all costs. Chances are, that without nostrums, the Great Depression would have ended in four years, instead of 17. With its return to prosperity, America would have had more than enough money to finance all the roads, schools, parks, and bridges that were built under FDR's make-work programs. But it is critically important to understand that it wasn't the fact that it took 17 years for the nostrums to work. They never worked. The idea that the New Deal succeeded is a myth. The Great Depression did not start until after politicians intervened and did not end until their intervention finally stopped, after subjecting the nation to more than 17 years of want and despair.
Capitalism did not produce depressions, and less intrusive means of intervention, including no federal intervention, produced far superior results.
But liberals, who live in a world in which ideology trumps evidence, missed the tragically abysmal failure that was the New Deal. To them the lesson of the Great Depression was the power of the nostrum: once established, nostrums never go away; they stay and breed more nostrums. In the hands of liberals, a nostrum is a ratchet. While libertarians and conservatives are appalled by the failure of FDR's economic assistance programs, liberals are enraptured by the welfare state that they established: the vibrant, lucrative poverty industry and the languid, needy underclass that it services, both intractable, both agitating for more and bolder nostrums.
This is why the New Deal consumes liberal thought, and why a nostrum is modern liberalism's only thought. The New Deal spawned the "Great Society," Lyndon Johnson's New Deal. And today America endures Barack Obama's "saturnalia of expropriation and waste." Today's liberal can conceive of neither a problem that does not require government intervention nor a solution that does not require a nostrum. Liberals do not care that their nostrums do not work (if one did, it wouldn't be a nostrum). A nostrum's main value lies in its ratcheting effect. As noted historian and FDR worshiperArthur Schlesinger, Jr. put it, "There seems no inherent obstacle to the gradual advance of socialism in the United States through a series of New Deals.”
When Republicans took power in 1953, even President Eisenhower, the architect of our victory in World War II, was afraid to scale back New Deal legislation. In 1969, President Nixon was afraid to cut back already failing Great Society legislation. He was warned by the friendly, and sincere, advice of Democrat Senator Daniel Patrick Moynihan: “All the Great Society activist constituencies are lying out there in wait, poised to get you if you try to come after them, the professional welfarists, the urban planners, the day-carers, the social workers, the public housers. . . . Just take [the] Model Cities [program], the urban ghettos will go up in flames if you cut it out.”
FDR gave us Social Security, the largest and most popular program of his legacy — the “most successful government program in the history of the world,” as Democrat Senator Harry Reid exclaimed. Johnson gave us Medicare, an even larger program. In retirement, all but the wealthiest among us depend on the benefits paid out by these two programs. But both are colossal Ponzi schemes, on track to go broke by 2034. This is not to say that a "social safety net" is unimportant or unnecessary. But, despite their laudable intentions, such entitlement programs, as they have been formulated by pandering politicians, are nostrums that have created an unfunded liability of $90 trillion and threaten to bankrupt the nation.
Today's liberal can conceive of neither a problem that does not require government intervention nor a solution that does not require a nostrum.
Let’s review the history of intervention in another way. When the market crashed in 1920, unemployment increased from 4% to 12%. By August 1921, the economy began its recovery. When the market crashed in 1929, unemployment increased from 4% to 9%, where it lingered for one month, before gradually decreasing to 6.3% in June 1930. The economy was recovering on its own from a mild recession. But that June, Republican President Hoover and a Democrat Congress enacted the Smoot-Hawley tariffs, the first in a long series of heavy-handed federal interventions. Unemployment soared to 16% in 1931. Massive federal spending, debt financing, tax increases, the denial of liquidity (by the Federal Reserve) to failing banks, and numerous other forms of federal tinkering crushed US GDP growth for the rest of the decade. Throughout the 1930s, the median annual unemployment rate was 17.2%. Unemployment did not fall below 14% until the early 1940s, when 12 million Americans were hired by the military.
In June 1930, had the federal government pursued the limited-government policies of the Harding-Coolidge administrations, the depression would have been over by 1932. But the nostrums that were pursued instead prolonged the depression, and, in the process, writes Robert Higgs (in “The Mythology of Roosevelt and the New Deal”), revolutionized "the institutions of American political and economic life," changed "the country’s dominant ideology," and created a leviathan that is "still hampering the successful operation of the market economy and diminishing individual liberties." The New Deal agencies, whose supreme ineptitude caused America to suffer more than ten years longer than it would have under limited-government policies, remain today. Notes Higgs:
One need look no further than an organization chart of the federal government. There one finds such agencies as the Export-Import Bank, the Farm Credit Administration, the Rural Development Administration (formerly the Farmers Home Administration), the Federal Deposit Insurance Corporation, the Federal Housing Administration, the National Labor Relations Board, the Rural Utility Service (formerly the Rural Electrification Administration), the Securities and Exchange Commission, the Social Security Administration, and the Tennessee Valley Authority — all of them the offspring of the New Deal. Each in its own fashion interferes with the effective operation of the free market. By subsidizing, financing, insuring, regulating, and thereby diverting resources from the uses most valued by consumers, each renders the economy less productive than it could be — and all in the service of one special interest or another.
Yet the myth — the pernicious myth — of the New Deal lives on. Today, as FDR blamed his predecessor and capitalism for America's economic plight, Mr. Obama, who won election waving the New Deal banner against the "Great Recession" of 2008, blames capitalism and George W. Bush. Obama even blamed Bush for adding $4.9 trillion to the national debt (money borrowed during eight years of Bush's tenure to finance establishment-Republican nostrums), calling it "irresponsible" and "unpatriotic" — just before he [Obama] went on to borrow $10.6 trillion for his nostrums, running up the national debt to an unprecedented $19 trillion.
With almost one year left for Mr. Obama to enlarge this staggering arrearage, both Democrat candidates for the 2016 presidential election propose the only thing that liberalism allows them to offer: more nostrums.
Hillary Clinton and Bernie Sanders, ever ready to put taxpayer money where their mouths are, clamor for a new New Deal — no doubt to build on the success of Obama's New Deal. A new New Deal is needed, they say, because "for too long,” as one activist put it, “the federal government has tolerated and perpetuated practices of racial and gender discrimination, allowed rampant pollution to contaminate our water and air, sent millions to prison instead of colleges and permitted Wall Street and CEOs to rig all the rules." Correcting the deficiencies of existing big government nostrums calls for a new New Deal with bigger Big Government.
Sanders has a new New Deal for $19.6 trillion (paid for with a 47% tax increase). Clinton even has one for "communities of color" — perhaps to lock in the votes of Americans, who, with Job-like patience, have been waiting more than 50 years for the ruthlessly inept Great Society programs to eliminate poverty and racial injustice, reconcile immigration, and improve public education.
Both Democrat candidates for the 2016 presidential election propose the only thing that liberalism allows them to offer: more nostrums.
After almost eight years of suffering Mr. Obama's nostrums (the Wall Street bailout, the auto industry bailout, the Stimulus, Quantitative Easing, the Green Economy, Dodd-Frank, Obamacare, Middle Class economics, the profligate regulatory morass . . . ), all of America waits, its economy in chronic stagnation— for bigger, better nostrums. We might as well wait for the Treasury Secretary finally to admit, "We are spending more than we have ever spent before and it does not work. I say after eight years of this administration we have just as much unemployment as when we started . . . And an enormous [$19 trillion] debt to boot!"
Willfully oblivious to the evidence, we resign ourselves to a stifling federal patrimony, where no problem escapes a New Deal style nostrum and "every attempt at a solution involves it in a maze of contradictions. Every artificial stimulant saps its inner strength. Every new measure conjures out of the ground a hundred new problems."
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1920: The Great Depression That Wasn't by C.J. Maloney
The Depression You've Never Heard Of: 1920–1921 by Robert P. Murphy
Great Myths of the Great Depression by Lawrence W. Reed
The Great Depression by Hans F. Sennholz
The Mythology of Roosevelt and the New Deal by Robert Higgs
FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression by Jim Powell
The Forgotten Man: A New History of the Great Depression by Amity Shlaes
New Deal or Raw Deal?: How FDR's Economic Legacy Has Damaged America by Burton Folsom
A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna Schwartz