Did FDR Make the Depression Great?

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The Politically Incorrect Guide to the Great Depression and the New Deal. By Robert P. Murphy. Regnery, 2009. 199 pages.

Robert Murphy demonstrates in this excellent book a penetrating ability to explain the essence of fallacious economic doctrines. As he notes, three theories offer competing explanations of the Great Depression: the Keynesian account, which stresses a lack of aggregate demand; Milton Friedman’s monetarism, which ascribes the severity of the early years of the Depression to a drastic cut in the money supply by the Fed; and, of course, the Austrian theory that Murphy himself favors.

Herbert Hoover, though not under Keynes’s influence, defended a version of the first theory. If wages were not kept high, purchasing power would be insufficient to restore prosperity. Accordingly, Hoover encouraged businesses to refrain from wage cuts.

Murphy quickly exposes the fallacy of this view:

High wages do not cause prosperity, they are rather an indication of prosperity. Ultimately, it doesn’t matter how many green pieces of paper employers hand out to workers. Unless workers first physically produced the goods (and services), there will be nothing on the store shelves for them to buy when they attempt to spend their big fat paychecks. (p. 35, emphasis in original)

But, it may be countered, is not the level of production and employment determined by aggregate demand? Granted that prosperity requires real goods, will not businessmen decide how much to produce based on what they think they will be able to sell? If so, is not the problem in a depression that, forecasting that future demand will be low, they cut back production?

Murphy once more locates the fundamental fallacy. The problem in a depression is not that production is in general too low; it is rather that resources have not been put to their best uses and need to be shifted:

By focusing on aggregate monetary conditions such as “total wage payments,” Hoover completely overlooked the fact that real, physical resources had to be rearranged in order to correct the imbalances in the economy. It wasn’t that “business” was producing too much, but rather that some sectors were producing too much, while other sectors were producing too little, in light of the economy’s supplies of resources, the skills and desires of its workers, and the tastes of its consumers. (p. 37)

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May 6, 2009

David Gordon [send him mail] is a senior fellow at the Ludwig von Mises Institute and editor of its Mises Review. He is also the author of The Essential Rothbard. See also his Books on Liberty.

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