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Was The The Great Depression was a Calamity of Unfettered Capitalism?
By LAWRENCE W. REED of FEE.
"To properly understand the events of the time, it is appropriate to
view the Great Depression as not one, but four consecutive depressions
rolled into one. The late economist Hans F. Sennholz labeled these four
“phases” as follows: the business cycle; the disintegration of the world
economy; the New Deal; and the Wagner Act. The first phase explains why
the crash of 1929 happened in the first place; the other three show how
government intervention kept the economy in a stupor for over a decade.
The Great Depression was not the country’s first depression, though it
proved to be the longest. The common thread woven through the several
earlier debacles was disastrous manipulation of the money supply by
government. For various reasons, government policies were adopted that
ballooned the quantity of money and credit. A boom resulted, followed
later by a painful day of reckoning. None of America’s depressions prior
to 1929, however, lasted more than four years and most of them were
over in two. The Great Depression lasted for a dozen years because the
government compounded its monetary errors with a series of harmful
interventions.
Most monetary economists, particularly those of the “Austrian school,”
have observed the close relationship between money supply and economic
activity. When government inflates the money and credit supply, interest
rates at first fall. Businesses invest this “easy money” in new
production projects and a boom takes place in capital goods. As the boom
matures, business costs rise, interest rates readjust upward, and
profits are squeezed. The easy-money effects thus wear off and the
monetary authorities, fearing price inflation, slow the growth of or
even contract the money supply. In either case, the manipulation is
enough to knock out the shaky supports from underneath the economic
house of cards.
One of the most thorough and meticulously documented accounts of the Fed’s inflationary actions prior to 1929 is America’s Great Depression by
the late Murray Rothbard. Using a broad measure that includes currency,
demand and time deposits, and other ingredients, Rothbard estimated
that the Federal Reserve expanded the money supply by more than 60
percent from mid-1921 to mid-1929. The flood of easy money drove
interest rates down, pushed the stock market to dizzy heights, and gave
birth to the “Roaring Twenties.” Some economists miss this because they
look at measures of the “price level,” which didn’t change much. But
easy money distorts relative prices, which in turn fosters unsustainable conditions in certain sectors.
By early 1929, the Federal Reserve was taking the punch away from the
party. It choked off the money supply, raised interest rates, and for
the next three years presided over a money supply that shrank by 30
percent. This deflation following the inflation wrenched the economy
from tremendous boom to colossal bust.
The “smart” money—the Bernard Baruchs and the Joseph Kennedys who
watched things like money supply—saw that the party was coming to an end
before most other Americans did. Baruch actually began selling stocks
and buying bonds and gold as early as 1928; Kennedy did likewise,
commenting, “only a fool holds out for the top dollar.”
When the masses of investors eventually sensed the change in Fed
policy, the stampede was underway. The stock market, after nearly two
months of moderate decline, plunged on “Black Thursday”—October 24,
1929—as the pessimistic view of large and knowledgeable investors
spread.
The stock market crash was only a symptom—not the cause—of the Great
Depression: the market rose and fell in near synchronization with what
the Fed was doing. If this crash had been like previous ones, the
subsequent hard times might have ended in a year or two. But
unprecedented political bungling instead prolonged the misery for twelve
long years.
Unemployment in 1930 averaged a mildly recessionary 8.9 percent, up
from 3.2 percent in 1929. It shot up rapidly until peaking out at more
than 25 percent in 1933. Until March 1933, these were the years of
President Herbert Hoover—the man that anti-capitalists depict as a
champion of noninterventionist, laissez-faire economics.
Did Hoover really subscribe to a “hands off the economy,” free-market
philosophy? His opponent in the 1932 election, Franklin Roosevelt,
didn’t think so. During the campaign, Roosevelt blasted Hoover for
spending and taxing too much, boosting the national debt, choking off
trade, and putting millions of people on the dole. He accused the
president of “reckless and extravagant” spending, of thinking “that we
ought to center control of everything in Washington as rapidly as
possible,” and of presiding over “the greatest spending administration
in peacetime in all of history.” Roosevelt’s running mate, John Nance
Garner, charged that Hoover was “leading the country down the path of
socialism.” Contrary to the modern myth about Hoover, Roosevelt and
Garner were absolutely right.
The crowning folly of the Hoover administration was the Smoot-Hawley
Tariff, passed in June 1930. It came on top of the Fordney-McCumber
Tariff of 1922, which had already put American agriculture in a tailspin
during the preceding decade. The most protectionist legislation in U.S.
history, Smoot-Hawley virtually closed the borders to foreign goods and
ignited a vicious international trade war.
Officials in the administration and in Congress believed that raising
trade barriers would force Americans to buy more goods made at home,
which would solve the nagging unemployment problem. They ignored an
important principle of international commerce: trade is ultimately a
two-way street; if foreigners cannot sell their goods here, then they
cannot earn the dollars they need to buy here.
Foreign companies and their workers were flattened by Smoot-Hawley’s
steep tariff rates, and foreign governments soon retaliated with trade
barriers of their own. With their ability to sell in the American market
severely hampered, they curtailed their purchases of American goods.
American agriculture was particularly hard hit. With a stroke of the
presidential pen, farmers in this country lost nearly a third of their
markets. Farm prices plummeted and tens of thousands of farmers went
bankrupt. With the collapse of agriculture, rural banks failed in record
numbers, dragging down hundreds of thousands of their customers.
Hoover dramatically increased government spending for subsidy and
relief schemes. In the space of one year alone, from 1930 to 1931, the
federal government’s share of GNP increased by about one-third.
Hoover’s agricultural bureaucracy doled out hundreds of millions of
dollars to wheat and cotton farmers even as the new tariffs wiped out
their markets. His Reconstruction Finance Corporation ladled out
billions more in business subsidies. Commenting decades later on
Hoover’s administration, Rexford Guy Tugwell, one of the architects of
Franklin Roosevelt’s policies of the 1930s, explained, “We didn’t admit
it at the time, but practically the whole New Deal was extrapolated from
programs that Hoover started.”
To compound the folly of high tariffs and huge subsidies, Congress then
passed and Hoover signed the Revenue Act of 1932. It doubled the income
tax for most Americans; the top bracket more than doubled, going from
24 percent to 63 percent. Exemptions were lowered; the earned income
credit was abolished; corporate and estate taxes were raised; new gift,
gasoline, and auto taxes were imposed; and postal rates were sharply
hiked."
"Perhaps the most radical aspect of the New Deal was the National
Industrial Recovery Act (NIRA), passed in June 1933, which set up the
National Recovery Administration (NRA). Under the NIRA, most
manufacturing industries were suddenly forced into government-mandated
cartels. Codes that regulated prices and terms of sale briefly
transformed much of the American economy into a fascist-style
arrangement, while the NRA was financed by new taxes on the very
industries it controlled. Some economists have estimated that the NRA
boosted the cost of doing business by an average of 40 percent—not
something a depressed economy needed for recovery.
Like Hoover before him, Roosevelt signed into law steep income tax rate
increases for the high brackets and introduced a 5 percent withholding
tax on corporate dividends. In fact, tax hikes became a favorite policy
of the president’s for the next ten years, culminating in a top income
tax rate of 94 percent during the last year of World War II."
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