Economic Myths and Realities about the Great Depression


Many myths abound regarding what caused the great depression. A familiar account is that excessive speculation and unregulated markets spurred the 1929 stock market crash and the policies enacted by FDR in the New Deal are responsible for America’s recovery. The true causes for this unprecedented disaster can be traced back to WW1 and the government interventions of the Hoover and Roosevelt administrations.



The Do-Nothing Boom vs the Do-Something Depression

Comparing the free market 1920s to the government activist 1930s
Comparing the free market 1920s to the government activist 1930s

1914-1929


The roots of the Great Depression can be traced back to the beginning of World War 1 in 1914. Up till this time the old economic order had prevailed with much success for decades among the worlds most advanced economies including the United States.

According to Wikipedia, Robert Higgs PhD is an economic history scholar. He’s a visiting scholar at Oxford and Stanford University and a scholar at the Cato institute. Higgs describes the old economic order, as a system of unrestricted free trade and investment, “a monetary system based on the “Gold Standard””, and a system of “reliable but limited government”. This system had outperformed any system the world had ever seen. Higgs farther says that:

“under this regime international trade, mass migration, and investment flourished. Nations developed their economic activities in accordance with their comparative advantages; and all the people of all the participating countries improved their economic well-being beyond any standard previously achieved by the masses and in certain regards even by the upper crust”.

WW1 all but totally destroyed the old economic order. Trade was disrupted; investments diverted to armaments production, millions were conscripted into military service, economic and civil freedoms were suspended and central planning and war socialism were implemented. By the end of the war, many of the worlds most advanced economies were in ruins.

After WW1 the advanced economic nations never returned to the economic system that had afforded them great success but handed over economic control to central bankers under the direction of their respective governments. Central planning intended to fix devastated economies, had instead spawned a host of economic distortions causing future problems.

In 1925 the British attempted to return to the gold standard, but their central bank intervened to set the value of the British pound higher than its market value, as a result British exports became too expensive and manufacturing suffered greatly. British investment capital flowed to the United States. In an attempt to help the British, The US Federal Reserve implemented policies to lower interest rates thereby making US investment less attractive to British investors. These artificially low interest rates created an unwarranted domestic demand for certain US stocks. This resulted in the creation of a bubble that would cause the stock market crash of 1929.



FDR and the New Deal

FDR's New deal prescriptions for Uncle Sam were bad medicine!
FDR's New deal prescriptions for Uncle Sam were bad medicine!

Common Myths


A common sentiment is that the 1929 Stock Market crash caused the Great Depression. If the stock market crash of October 1929 caused the Great depression, why is it then that the market was able to fully recover by April 1930- within six months?

It’s a common belief that the stock market crash precipitated massive unemployment buts let’s take a look at the available government statistics. Harvard economist Thomas Sowell quotes statistics by scholars Vedder and Gallaway regarding unemployment rates following the October 1929 crash.Here’s what they found-

“They put the unemployment rate at 5 percent in November 1929, a month after the stock market crash. It hit 9 percent in December-- but then began a generally downward trend, subsiding to 6.3 percent in June 1930.”

The Smoot Hawley tariff act was passed in June 1930, only 5 months unemployment reached double digits. For three years beginning in 1932 unemployment exceeded 20%, this coincided with the ill-fated policies of Hoover and FDR.

From our nation’s founding till 1930 the US economy experienced many downturns of differing severity. The government up till this point never thought to intervene and had assumed they had no Constitutional authority to do so. Mind you most economic downturns or panics as some call them corrected themselves inside a year with little or no government intervention.



Unemployment created by the New Deal

The New Deal's unconstitutional interventions extended the Great Depression by more than a decade.
The New Deal's unconstitutional interventions extended the Great Depression by more than a decade.

Massive Government Failure


The Great Depression was caused by a massive failure of government and not by a failure in the free market as many are led to believe. According to Chris Edwards, director of tax policy at the Cato institute, there were six major policy errors that kept the economy from recovering in the 1930’s. The errors included monetary contraction, tax hikes, barriers to international trade, keeping prices high, keeping employment costs high and harassment of businesses.

Monetary contraction

By sharply raising interest rates the Federal Reserve precipitated a 25% decline in the money supply from 1929-1933. By money supply I’m referring to money in circulation. Bank failures to a lesser degree also helped shrink the money supply and create a general panic.

Tax hikes

Tax cuts in the early 1920’s, led to an economic boom, lessons learned from this where forgotten. Hoover signed the revenue act of 1932 which was the largest peacetime tax hike in American history, it raised the top individual rates from 25% to 63%. FDR increased top individual tax rates to 79% along with increasing corporate rates. Many state and local governments imposed income taxes for the first time along with increasing tax rates. All this did was to kill incentives for investment and job creation.

Barriers to international trade

The Smoot Hawley act was signed into law By Hoover in 1930. Smoot Hawley dramatically raised import tariffs on tens of thousands of products. Scores of our trading partners overseas responded by raising tariffs on us. World trade plummeted and US manufacturing was dealt a severe blow.

Keeping prices high

FDR’S National Industrial Recovery Act of 1933 set up cartels in hundreds industries for the purpose of limiting competition. Employers were coerced into limiting production in order to keep prices and wages high. Livestock and foodstuffs were destroyed in mass at a time when they were dearly needed. The Supreme Court stuck this legislation down in 1935. These misguided policies served to increase unemployment and raise prices on goods that families sorely needed. FDR’s 1932 Democratic primary rival Al Smith even called FDR’s New Deal programs Fascist.

Keeping employment costs high

New deal programs kept employment costs high thereby increasing unemployment. The NIRA mandated higher wages and minimum wages were enforced which decreased the demand for low skill workers. The Davis Bacon Act required very high wages on Federal work. Laws were passed that mandated joining unions and encouraged union bullying tactics. Millions of make work jobs were created by the government but the private sector actually shrunk after a decade of government interventions.

Harassment of businesses

Like today, in the 1930’s investment stagnated because of the atmosphere of uncertainty caused by the continual stream of government interventions. The government then like now, used a poor economy to demonize businesses and investors for political purposes. After encouraging cartels and high prices, for political reasons FDR hired hundreds of new lawyers to sue businesses for setting high prices and for creating monopolies. FDR used these self- created crises as an excuse to seize ever larger amounts of federal power, issuing thousands of executive orders.


Conclusion


What probably should have been a 2-3 year economic downturn, turned into a depression that really only ended in 1946. In 1946 the stock market had regained the levels reached in 1929. The lesson that should have been learned, is that government meddling in the private sector doesn’t work and worse yet, creates an environment of corruption where individual liberties are threatened and working people are hurt most severely. Unfortunately politicians, especially liberal politicians welcome this kind of crisis as it creates opportunities to usurp power, manipulate the economy to gain influence and give favors to political allies to buy votes and loyalty.







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Comments 24 comments

billd01603 profile image

billd01603 3 years ago from Worcester

Good Hub wba. What good is studying history if we refuse to learn anything


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

billd01603- Thanks for stopping by! We all know the definition of insanity, "doing the same thing and expecting different results"! It seems that this country learned the wrong lessons from the Great Depression because they're intent on repeating the same mistakes! The government interventions into the economy, for the past 4 years can attest to this.


Rod Marsden profile image

Rod Marsden 3 years ago from Wollongong, NSW, Australia

Interesting take on the causes of the Great Depression. For the rest of the world, including Australia, the cause of the Great Depression was the USA calling in its loans early. Germany was the first nation to be hit by USA demands for USA loan money.


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

Rod Marsden-Thank you for your comments! Not doubt that since America was the worlds creditor after WW1, calling in their loans would have worldwide impact. The Smoot-Hawley tariff act of 1930 also disrupted worldwide trade because it started a trade war. Nations couldn't pay their debts to America because they no longer traded with America.


dahoglund profile image

dahoglund 3 years ago from Wisconsin Rapids

In the last few years I have come to somewhat the same conclusions. although I don't have much in the way of economics background. Great hub. sharing.


Suhail and my dog profile image

Suhail and my dog 3 years ago from Mississauga, ON

Paul Samuelson and William Nordhaus in their book 'Ecomomics' state that it was indeed the failure of the Government, primarily because macroeconomics, as a subject, did not exist back then. Governments, consumers, and businesses did not know how macroeconomic tools of financial, monetary, and trade policy affected macroeconomic objectives of raising GNP, reducing inflation, increasing employment and increasing net exports.

If you look at the blunders you have mentioned in your hub, they all point to the fact that Government did not know management of macroeconomic objectives through macroeconomic tools, which is attributable to the fact that the subject had not come around yet.


Rod Marsden profile image

Rod Marsden 3 years ago from Wollongong, NSW, Australia

So, Suhail, do you think the US government knows more nowadays about preventing a Great Depression? Recent events seem to suggest they do not at all have enough of an understanding.


Suhail and my dog profile image

Suhail and my dog 3 years ago from Mississauga, ON

Rod,

Oh surely! They know everything.

However, Ariana Huffington points out in her bestseller 'Third World America' that American governments are hostage to lobbies and cartels. White House corridors are hectically lobbied by corporations and foreign countries.

Another issue is polarity in US politics that doesn't let one government fully commit to improving the economy.


Rod Marsden profile image

Rod Marsden 3 years ago from Wollongong, NSW, Australia

The 'other issue' can also be found in Australia.


Suhail and my dog profile image

Suhail and my dog 3 years ago from Mississauga, ON

I am aware of that, Rod :-)


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

dahoglund- It's good to see I'm not alone in my thinking, thanks for the comment!


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

Suhail and my dog- Thank you for your well thought out comments! There is no doubt that Macroeconomics has come a long way since the Great Depression and that Paul Samuelson and William Nordhaus are brilliant economists.

I believe Macroeconomics to be a useful tool if used for certain defined objectives. On the other hand, Macroeconomics economics has its limitations and this is because it involves facets of human behavior that are next to impossible to predict. I remember in my college economics course they had formulas with a dozen or more factors each weighted differently in order to try to predict an outcome. On top of this there were so many competing theories. You could have a dozen world famous economist’s each try to solve the same problem and they would all have different solutions.

I think the problem lies here, that however brilliant the economist his methods of solving economic problems via central planning, it’s still no match for the genius of millions of independent decision makers in the marketplace. The reason for this is that they are closer to problems they need to solve and collectively have much better information regarding what needs to be produced and what any given product is worth.


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

Rod Marsden- I believe your right to suggest that the government is still in limited in its ability to prevent an economic meltdown, like the one we experienced in 2008. The subsequent bailouts, regulations and stimulus spending, have had about the same impact that the New Deal programs had. After 8 years of government intervention, FDR’s own treasury secretary admitted that the the country was in worse shape than when they started.


Rod Marsden profile image

Rod Marsden 3 years ago from Wollongong, NSW, Australia

wba108@yahoo.com, a recent documentary on television by Ken Burns titled Dust Bowl reveals some contributing factors of the Great Depression era that would have added to the hardship as well as to the length of the depression.

Drought and poor farming methods in the USA had destroyed much farm land. The novel The Grapes of Wrath also outlines what happened to the people. There was no possible quick fix solution to the dust storms and the lack of produce on farms. New methodology was introduced to save and protect what could be saved and protected. Even so, the drought condition and the desert like sand drifts of what had once been prime farming land continued for 8 years or more.

There has also been soil degredation in Australia but not on the same massive scale as the USA in the 1930s. Acutally, NSW had just gotten over a terrible drought when the Great Depression hit. Just when there were bumper crops the overseas market collapsed.


Suhail and my dog profile image

Suhail and my dog 3 years ago from Mississauga, ON

wba108@yahoo.com,

That is why when I was teaching macroeconomics 101 at a university back in the 90s, I used to tell my students that macroeconomics is an art, not science hahaha.

Macroeconomic indicators can be used to certain extent to predict feasibility of major commercial projects, but the truth is uncertainty remains key to any decision making.


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

Suhail and my dog- Even though I got a degree in Economics, it really wasn’t my strong suit; I had to get lots of help with the math. I was really a lot more interested in the philosophy behind the theories, than actually being able to deal with the hard data. Thanks for your input!


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

Rod Marsden- No doubt the drought and soil degradation contributed somewhat to the severity of the Great Depression. But at this time the government coerced farmers to limit production, the farmers were destroying livestock and foodstuff in mass, to comply with the government efforts to keep prices and wages high. This sounds more like another government created crisis that was blamed on the supposed failure of the free market.


Rod Marsden profile image

Rod Marsden 3 years ago from Wollongong, NSW, Australia

Check out the documentary Dust Bowl, wba108@yahoo.com. Yes, there was drought and soil degradation brought on by poor farming methods.

Perhaps in some parts of the USA the government was destroying foodstuff to keep prices high. I know that sour apple tree orchards had been chopped down in the 1920s in support of Prohibition (no dry apple cider).

In the Dust Bowl region livestock was being wiped out by dust so no need to destroy livestock. The Dust Bowl wasn't government created. Perhaps you can blame the free market for poor farming methods. I wouldn't. For both farmers and government it was just a hard lesson that had to be learned.

The government did buy some land off farmers and let it go back to prairie land as a buffer for other land. It was a case of figuring out how much cash crop could grow and how best to keep the land from blowing away.

As for soil degradation caused by past poor farming methods, it is evident in NSW, Australia. Visit Orange or Bathurst some time.

http://en.wikipedia.org/wiki/Dust_Bowl

http://www.sbs.com.au/documentary/program/1170


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

Rod Marsden - Thanks for your comments! The effects of the Dust Bowl sounds like an interesting bit of history, I will check it out.


Onusonus profile image

Onusonus 3 years ago from washington

WBA, good job! Milton Friedman would be proud.


Rod Marsden profile image

Rod Marsden 3 years ago from Wollongong, NSW, Australia

You are welcome wba108@yahoo.com


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

Onusonus - Glad to hear from you! Freidman is great, I love to hear his You Tube video's. He's like a philosopher for free markets.


drpastorcarlotta profile image

drpastorcarlotta 3 years ago from BREAKOUT MINISTRIES, INC. KC

Voted-Up! On this Hub. Glad to see you again on my Hub, thank you!


wba108@yahoo.com profile image

wba108@yahoo.com 3 years ago from upstate, NY Author

dr carlotta- I appreciate your visit and your vote-up, thanks!

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