Condensed Version of The Politically Incorrect Guide to American History by Thomas E. Woods, Jr. Regnery Publishing, Inc. 270 p.
Compiled and Edited by
Dr. Jimmy T. (Gunny) LaBaume
Chapter 11: The Great Depression and the New Deal
What caused the economic downturn and the stock market crash of October 1929?
Most historians blame the depression on capitalism claiming the boom-bust cycle to be an inherent part of the market economy. However, the argument proposed by the Austrian School of economics is the opposite. The cycle is not a feature of the market economy. Instead, it is set in motion by the central bank.
Hoover: A “do nothing” president? If only!
Most people believe that Hoover did nothing and that it was Roosevelt’s intervention that brought recovery. But that is not true. Hoover did not sit idly by. In fact, practically the whole New Deal was extrapolated from programs that Hoover started. Furthermore Hoover’s meddling actually made the situation worse.
Hoover implored key business leaders to refrain from cutting wages since they gave workers the means to purchase goods. Every American history textbook has dutifully adopted Hoover’s philosophy that the downturn was caused by “under-consumption.” This is fallacious. If the cause had been a reduction in consumer spending, we would expect the hardest-hit segment of the economy to be the consumer goods sector. Instead, it was the durable and capital goods industries that suffered the most. It was in these heavy industries where the bulk of unemployment was concentrated.
Hoover’s theory neglected to recognize that wages are a cost of doing business. By demanding high wages while prices were declining made it difficult for businesses to hire people. The result was predictable—i.e. mass unemployment.
Hoover’s mistake was to presume that high wages were the cause of prosperity rather than a reflection of that prosperity. If high wages could produce prosperity, we could eliminate world poverty simply by enforcing a minimum wage of $100 per hour.
Meddling in agriculture
Hoover’s agricultural policy was a disaster. Farmers were struggling to make a living simply because there were too many of them. The agricultural sector had expanded during World War I. With the war over, it was bloated.
Hoover established a Federal Farm Board which made loans to cooperatives so that farmers could keep their crops off the market until prices rose. Whenever this did result in higher prices, farmers produced more the following year making the surplus even worse.
In addition, the Farm Board authorized massive purchases of wheat at well above the world price. Government bureaucrats were sure that by keeping wheat off the market, a world shortage would ensue. Instead, Canadian and Argentinean producers grabbed America’s market share.
Furthermore, the huge surpluses bought up by the government depressed prices even more since the world knew that they would eventually be dumped on the market.
For a program like this to work, strict limits had to be imposed on how much farmers could produce. As would be logically expected, requests for voluntary cutbacks fell on deaf ears.
More brilliance: Tax increases
The Smoot-Hawley Tariff was originally intended to protect American agriculture. Once the cat was out of the bag, there was no feasible way to limit such protection to one sector. Pressure groups from countless industries flocked to Washington.
The tariff hit American export industries hard and her trading partners retaliated.
Then there were other tax increases. The Revenue Act of 1932 was the largest peacetime income tax increase in history up to that point. Thus, in the midst of depression, when private investment was desperately needed, it was made much less attractive.
Hoover the big spender
Hoover also vastly increased spending on public-works projects. He subsidized shipbuilding, supplied failing businesses with emergency loans and lent money to the states for unemployment relief. The result was ongoing economic catastrophe.
FDR comes to town
Franklin Delano Roosevelt defeated Hoover in 1932 and is routinely listed among the “great” presidents. The fact is that there was no one more ignorant of economics. He knew nothing about how wealth was created. His proposed legislation was a patchwork of absurdities at odds with each other and with themselves.
Seeking prosperity through central planning
The National Industrial Recovery Act (NIRA) established the National Recovery Administration which sought to keep wages high. But then on the other hand, it established cartels that were allowed to establish minimum prices. The artificially high wages translated into unemployment while the high prices brought hardship to everyone.
Let’s help starving people by destroying food!
FDR proposed to pay farmers for cutting back on production or producing nothing at all. In the meantime, he had to deal with the existing bounty so he decided to destroy much of what had already been produced to create a shortage. Six million pigs were slaughtered and ten million acres of cotton were destroyed. In the meantime, a Department of Agriculture study found that America was not producing enough food to sustain its population at a subsistence level. It took a special kind of mind to conclude that the solution was to make food more expensive.
Evidence that FDR’s approach was seriously flawed continued to mount. One report concluded that farm income would have been at least as high and maybe even higher without the American Agriculture Administration (AAA). This organization was found to be responsible for the joblessness of at least two million people.
Furthermore, the National Recovery Administration had been even more successful in forcing up prices that consumers had to pay for manufactured goods. Thus, as consumers of such goods, farmers actually found themselves worse off.
FDR’s legacy in agriculture
Unfortunately, government intervention in agriculture never went away. Its principle devise is price support. Government pays farmers a certain amount and will buy whatever amount the farmers are willing to sell at that price. Logically, farmers will not sell on the market if the government’s price is higher than the market price. Thus, the government winds up with large amounts of produce which it then has to figure out how to dispose of without driving prices down. Solution? Often they just destroy the produce.
FDR’s anti-business zealotry delays recovery
Increased labor costs brought on by New Deal labor laws contributed to unemployment. “Regime uncertainty” also hindered recovery. Businessmen and investors unsure of what the government will do next simply stopped investing. This uncertainty about the future boiled down to uncertainty about future government policy.
The consequences of labor legislation
Then came the National Labor Relations Act (also known as the Wagner Act of 1935).
The standard history text automatically assumes that what is good for unions is good for workers but that is not necessarily so. The fact is that the whole purpose of a union is to exclude people in order to raise wages. Labor unions actually impoverish society by introducing distortions in the labor market and rules that discourage efficiency and innovation.
Economists Richard Vedder and Lowell Gallaway found that wages suffered dramatically as a result of an economy that is 30 to 40% smaller than it would have been in the absence of unions.
Labor historians are hard pressed to explain why real wages climbed incredibly during the time when unionism was numerically negligible or why American workers were so much better off than their highly unionized counterparts in Europe. Most of them simply neglect to mention such things.
The disaster of “public works”
Spending projects to provide jobs are funded by taking money from some people (taxpayers) and giving it to others. This, in turn, diverts capital from the private sector and inhibits healthy job creation.
Thus, New Deal programs simply displaced (or actually destroyed) private-sector jobs and diverted capital to inherently wasteful government projects.
Buying votes with make-work jobs
FDR’s public works projects were rife with corruption. For example: The South (where people were the poorest) received the least assistance while the preponderance of WPA projects went to the western States. Why? The short answer is that FDR’s electoral margin had been thin in the west. He spent more on western states because the South was much more politically secure (he had little need to buy their votes).
WPA workers were pressured to support FDR’s candidates, change party affiliations and/or “contribute” to FDR’s re-election campaign.
Standard history texts provide details of Richard Nixon’s “Watergate” capers but do not include a word as to how FDR was a pioneer at the same type of activity.
Not so fast, Court tells FDR
It is heartwarming to recall a time when programs such as the New Deal were criticized on constitutional grounds. The National Industrial Recovery Act and the Agricultural Adjustment Act were actually declared unconstitutional.
This infuriated FDR and he promptly proposed that, when any Supreme Court justice reached age 70, one additional justice could be added to the Court. This would have allowed him to add six more justices.
The bill was rejected but FDR’s intimidation of the Court had its effects. As it turned out, he would get his chance to influence the Court after all. Over the next 4 years he was able to fill 7 vacancies caused by resignations, retirements and death.
What the new Court was like
In Wickard v. Filburn (1942), the court ruled that a farmer growing wheat for his own use was engaged in “interstate commerce” and was, therefore, subject to regulation. By this standard, anything could be called “interstate commerce and therefore be subject to federal regulation.
Thus, the court became an instrument for justifying federal actions and reducing states to subordination. In addition, in Currin v. Wallace (1939) the court suggested that the federal government could extend its power over virtually any area that might contribute to the “general welfare.”
Did World War II lift America out of the Depression?
The new deal did not get America out of the depression and, contrary to the standard “party line,” neither did World War II. (If that was so then it might be a good idea to stay at war all the time.)
Most of the observable increase in production figures was due to the construction of armaments and military equipment and not things that ordinary people need. Thus, this makes consumers worse off by diverting limited resources to the production of goods that no consumer wants to buy.
During the time, some two fifths of the labor force was producing neither consumer goods nor capital goods. The tax monies of the remaining 60% went to fund the activities of the 40% that were not producing things consumers needed. This amounted to a dramatic loss of material wealth.
The military draft reduces unemployment!
Unemployment disappeared because 11 million people were conscripted. Meanwhile, the average work week increased and it became difficult (sometimes impossible) to acquire the goods people needed—cars, houses, appliances, chocolate, sugar, meat, gasoline, rubber tires and on and on. But people were fooled into believing they were prosperous because they were accumulating large amounts of unspendable income.
This is not prosperity. Economic legislation did not bring the depression to an end and neither did World War II. What brought it to an end was the return to normalcy and the removal of uncertainty that had haunted businesses during FDR’s years.
Prosperity would have returned much sooner had it not been for the destructively foolish policies of Hoover and Roosevelt.
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The Essence of Liberty Volume I: Liberty and History chronicles the rise and fall of the noble experiment with constitutionally limited government. It features the ideas and opinions of some of the world’s foremost contemporary constitutional scholars. This is history that you were not taught at the mandatory government propaganda camps otherwise known as “public schools.” You will gain a clear understanding of how America’s decline and decay is really nothing new and how it began almost immediately with the constitution. Available in both paperback and Kindle versions.
You might be interested in the other two volumes of this three volume set The Essence of Liberty Volume II: The Economics of Liberty and The Essence of Liberty Volume III: Liberty: A Universal Political Ethic.