$20 $17 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.
According to 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 school kids.
It is Murphy’s purpose to set the record straight.
In dealing 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.
The Great Myths
The political account of the Great Depression, a tradition taught throughout the land from the Cold War to the present day, tells us that
- following 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 1930s;
- People demanded and Roosevelt provided a radical new approach to government’s relationship to the economy, which eventually got us out of the Depression;
- Roosevelt 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.
Because these are the politically correct views of the Depression, our leaders are drawing on these myths to “fix” the current crisis.
Hoover the Interventionist
There was nothing “laissez-faire” 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,
Hoover 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. 32)
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. 33).
Indeed, during 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).
By contrast, 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).
Hoover’s Tax on Imports
Concerned about 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).
Hoover hurt 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.
Hoover as a Tax-and-Spend Democrat
Incredible 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 deficits.
Murphy concedes 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 (p. 50).