Sets the Record Straight
by George F. Smith
Will Barack Obama's
New Deal finally sink the American economy into the sands? This is
the question author Robert P. Murphy poses at the end of his latest
myth buster, The
Politically Incorrect Guide to the Great Depression and the New Deal.
Readers who follow Murphy's narrative from page one will understand
that unless the current administration suddenly turns pro free market
and gets out of the way, our future looks grim at best.
Austrian theory, inflation generates the business cycle, which means
it causes periodic depressions. When a collapse came in 1929, government
broke with precedent and adopted measures to minimize the pain of
readjustment but in so doing retarded recovery. Through a long succession
of economic interventions, both the Hoover and Roosevelt administrations
turned what likely would have been a typically brief depression
into the Great Depression. Historians and economists, though, have
developed arguments extolling the fascist policies of the Roosevelt
years for saving an inherently flawed capitalist system, while heaping
blame on Hoover for his do-nothing approach. Intentionally or not,
they created a mythology that has been fed to generations of American
It is Murphy's
purpose to set the record straight.
with such an emotionally charged topic as the Depression, the author
shows remarkable patience and fairness throughout. Yet his logic
is unyielding. At the end of his book, there is hardly a Depression
myth left standing. But at the end, I suspect it isn't only free
marketeers who are still reading.
account of the Great Depression, a tradition taught throughout the
land from the Cold War to the present day, tells us that
the crash, Hoover's "do-nothing" policies brought the laissez-faire
economy to its knees;
- the Federal
Reserve, our government-created economic stabilizer, failed to
provide enough credit to keep prices from falling during the early
- People demanded
and Roosevelt provided a radical new approach to government's
relationship to the economy, which eventually got us out of the
had to abolish the gold standard to stabilize the banking system;
- More recent
research reveals it wasn't New Deal policies as such that ended
the Depression, but those policies writ large in the monumental
expenditures and manpower requirements of World War II.
are the politically correct views of the Depression, our leaders
are drawing on these myths to "fix" the current crisis.
There was nothing
about Herbert Hoover. He was a staunch interventionist throughout
his political career. As secretary of commerce under Warren Harding,
he "set out to reconstruct America [his words]" to fix the depression
of 1920–1921 (p. 32). "Throughout 1921," Murphy writes,
did what he could to persuade Congress to enact public works
programs to stabilize the economy. Fortunately, the depression
ended before Hoover's grandiose plans could be realized. (p.
When the next
collapse came in 1929, he called leading financiers and businessmen
to the White House and got them to agree to support current wages,
positions, and investment spending. One of those in attendance was
Henry Ford, who thought wages "must not even stay on their present
level; they must go up" (p. 37). Hoover himself thought "high wages
and low prices" were the "very essence of great production" (p.
the 1930s, as the prices of most goods and services were plummeting,
wages remained high. Workers with jobs frequently had more buying
power than they had in the booming '20s. But with falling revenue,
businesses couldn't maintain their staff levels. "[U]nemployment
went up and up and up, hitting the unimaginable monthly peak of
28.3 percent in March 1933" (p. 42).
without wage support in the earlier depression, unemployment peaked
at 11.7 percent in 1921, then fell to 2.4 percent by 1923. "That
is how a market with flexible wages and prices quickly corrects
itself after a Fed-induced inflation," Murphy adds (p. 42).
falling farm prices following the crash, Hoover called on government
to make Americans pay more for food. But the Smoot-Hawley
Tariff of June 17, 1930, did more than raise prices of farm
products. It raised taxes on over 20,000 imported goods to record
levels. Among the tariff increases were over 800 items used in making
cars. In combination with retaliatory tariffs from European countries,
Smoot-Hawley pulled American car sales down from 5.3 million in
1929 to 1.8 million in 1932 (p. 43).
the very group he was trying to protect. Because tariff hikes mean
fewer foreign goods are sold in this country, foreigners have fewer
dollars with which to buy American goods. Not surprisingly, American
exports dropped from $7 billion in 1929 to $2.5 billion by 1932.
Since the US agricultural industry was a net exporter, American
farmers were hurt more than many other producers.
a Tax-and-Spend Democrat
as it seems today, the federal government ran budget surpluses every
year of the Roaring '20s and managed to pay down its debt from $25
billion in FY 1919 to $16.2 billion in FY 1930 (p. 47). With plummeting
tax receipts following the crash, Hoover turned to deficit financing
to support a budget increase of 42 percent during his first two
years, a classic Keynesian response to a collapse in "aggregate
demand" (p. 48). In an attempt to reduce the growing budget deficit,
Hoover and Secretary of the Treasury Andrew Mellon convinced Congress
to pass a huge
and encompassing tax increase in 1932. Yet as we would expect
from the Laffer
curve, the Treasury saw only modest gains in receipts due to
the shrunken tax base.
As Murphy points
out, government cut its budget during the depression of 1920–1921
– from $5 billion in FY 1921 to $3.3 billion in FY 1922. When the
depression was over for Harding, Hoover was trying to rein in his
that, in light of the data alone, it's theoretically possible Keynesians
are right. They could argue, say, that the budget cuts during the
early '20s actually exacerbated the depression, while Hoover's stimulus
during the '30s averted even higher unemployment rates. But following
the principle of keeping assumptions to a minimum – Occam's
razor – we should stick with what has always worked, he concludes.
Both government and the people should slash spending during a depression
the rest of the article
June 17, 2009
F. Smith [send him mail]
is the author of The
Flight of the Barbarous Relic, a novel about a renegade Fed
chairman. Visit his website.
Visit his blog.