Mackinac Center for Public Policy | Great Myths of the Great Depression 1

Great
“HERBERT HOOVER
believed government should play
no role in the economy.”

Myths “GOVERNMENT PROGRAMS

helped lower unemployment by

of the putting many Americans to work.”

Great
“FRANKLIN ROOSEVELT’S
‘New Deal’ saved America from the
failure of free-market capitalism.”

Depression This edition is a joint project of the Mackinac Center for Public Policy
These and other
myths are dispelled
by the facts in this
and the Foundation for Economic Education
essay by economist
FOUNDATION FOR ECONOMIC EDUCATION
Lawrence W. Reed
Freedom’s Home Since 1946
Mackinac Center for Public Policy | Great Myths of the Great Depression 2

To James M. Rodney
a great friend of truth, character and liberty

Great Myths of the Great Depression by Lawrence W. Reed. Original edition printed in 1981.
This edition was printed in 2008 — during the 20-year anniversary of the Mackinac Center for Public Policy —
as a joint project of the Mackinac Center and the Foundation for Economic Education.
Mackinac Center for Public Policy | Great Myths of the Great Depression 1

Great Myths of the Great Depression

S
tudents today are often given a skewed account of the Great Depression of 1929-1941 that
condemns free-market capitalism as the cause of, and promotes government intervention as the
solution to, the economic hardships of the era. In this essay based on a popular lecture, Mackinac
Center for Public Policy President Lawrence W. Reed debunks the conventional view and traces the
central role that poor government policy played in fostering this legendary catastrophe.
four workers was out of a job at
Introduction the Depression’s nadir, and ugly
Many volumes have been written rumors of revolt simmered for the
about the Great Depression of first time since the Civil War.
1929-1941 and its impact on the
lives of millions of Americans. “The terror of the Great Crash
Historians, economists and has been the failure to explain it,”
politicians have all combed the writes economist Alan Reynolds. THE GREAT DEPRESSION devastated every
wreckage searching for the “black “People were left with the part of America, even its smallest towns.
box” that will reveal the cause of feeling that massive economic
the calamity. Sadly, all too many contractions could occur at of capitalism, the stock market,
of them decide to abandon their any moment, without warning, crashed and dragged America
search, finding it easier perhaps without cause. That fear has into depression. President
to circulate a host of false and been exploited ever since as the Herbert Hoover, an advocate
harmful conclusions about the major justification for virtually of “hands-off,” or laissez-faire,
events of seven decades ago. unlimited federal intervention economic policy, refused to use
Consequently, many people in economic affairs.”1 the power of government and
today continue to accept critiques conditions worsened as a result.
of free-market capitalism that Old myths never die; they just It was up to Hoover’s successor,
are unjustified and support keep showing up in economics Franklin Delano Roosevelt,
government policies that are and political science textbooks. to ride in on the white horse
economically destructive. Wi t h o n l y a n o c c a s i o n a l of government intervention
exception, it is there you will find and steer the nation toward
How bad was the Great what may be the 20th century’s recovery. The apparent lesson
Depression? Over the four years g re ate st my th: C apit ali sm to be drawn is that capitalism
from 1929 to 1933, production at and the free-market economy cannot be trusted; government
the nation’s factories, mines and were responsible for the Great needs to take an active role in
utilities fell by more than half. Depression, and only government the economy to save us from
People’s real disposable incomes inter vention brought about inevitable decline.
dropped 28 percent. Stock prices America’s economic recovery.
collapsed to one-tenth of their But those who propagate this
pre-crash height. The number version of history might just
of unemployed Americans rose A Modern Fairy Tale as well top off their remarks
from 1.6 million in 1929 to 12.8 According to this simplistic by saying , “And Goldilocks
million in 1933. One of every perspective, an important pillar found her way out of the forest,
Mackinac Center for Public Policy | Great Myths of the Great Depression 2

Dorothy made it from Oz back There was already a long

to Kansas, and Little Red Riding history of margin lending on
Hood won the New York State stock exchanges, and margin
Lottery.” The popular account of requirements — the share
the Depression as outlined above of the purchase price paid in
belongs in a book of fairy tales cash — were no lower in the
and not in a serious discussion late twenties than in the early
of economic history. twenties or in previous decades.
In fact, in the fall of 1928 margin
People who argue that the free-market requirements began to rise, and
THe Great, economy collapsed of its own weight in borrowers were required to pay
Great,Great,Great the 1930s seem utterly unaware of the
a larger share of the purchase
Depression critical role played by the Federal Reserve
System’s gross mismanagement of money price of the stocks.
To properly understand the and credit.
events of the time, it is factually The margin lending argument
appropriate to view the Great was disastrous intervention by doesn’t hold much water. Mischief
Depression as not one, but four government, often in the form with the money and credit supply,
consecutive downturns rolled into of political mismanagement of however, is another story.
one. These four “phases” are:2 the money and credit supply.
None of these depressions, Most monetary economists,
I. Monetary Policy and the however, lasted more than four particularly those of the “Austrian
Business Cycle years and most of them were School,” have observed the close
II. The Disintegration of the over in two. The calamity that relationship between money
World Economy began in 1929 lasted at least supply and economic activity.
three times longer than any of the When government inflates the
III. The New Deal
country’s previous depressions money and credit supply, interest
IV. The Wagner Act because the government rates at first fall. Businesses
compounded its initial errors with invest this “easy money” in new
The first phase covers why the a series of additional and harmful production projects and a boom
crash of 1929 happened in the interventions. takes place in capital goods. As
first place; the other three show the boom matures, business
how government intervention costs rise, interest rates readjust
worsened it and kept the economy Central Planners Fail upward, and profits are squeezed.
in a stupor for over a decade. Let’s at Monetary Policy The easy-money effects thus wear
consider each one in turn. A popular explanation for the off and the monetary authorities,
stock market collapse of 1929 fearing price inflation, slow the
concerns the practice of borrowing growth of, or even contract, the
Phase I: money to buy stock. Many history money supply. In either case,
The Business Cycle texts blithely assert that a frenzied the manipulation is enough to
The Great Depression was not the speculation in shares was fed by knock out the shaky supports
country’s first depression, though excessive “margin lending.” But from underneath the economic
it proved to be the longest. Marquette University economist house of cards.
Several others preceded it. Gene Smiley, in his 2002 book
“Rethinking the Great Depression”, One prominent interpretation
A common thread woven through explains why this is not a fruitful of the Federal Reserve System’s
all of those earlier debacles observation: actions prior to 1929 can be found
Mackinac Center for Public Policy | Great Myths of the Great Depression 3

in “America’s Great Depression”

by economist Murray Rothbard.
Using a broad measure that
includes currenc y, demand
and time deposits, and other
ingredients, he estimated that the
Fed bloated the money supply by
more than 60 percent from mid-
1921 to mid-1929.3 Rothbard
argued that this expansion of
money and credit drove interest
rates down, pushed the stock
market to dizzy heights, and gave
birth to the “Roaring Twenties.”

Reckless money and credit growth Unemployment skyrocketed after Congress raised tariffs and taxes in the early 1930s and
stayed high as policies of the Roosevelt administration discouraged investment and recovery
constituted what economist during the rest of the decade.
Benjamin M. Anderson called
“the beginning of the New Deal”4 prices lower than they would bank took further deflationary
— the name for the better-known have otherwise been. action by aggressively selling
but highly interventionist policies gover nment s e c ur itie s for
that would come later under Regarding Fed policy, free- months after the stock market
President Franklin Roosevelt. market economists who differ on crashed. For the next three years,
However, other scholars raise the extent of the Fed’s monetary the money supply shrank by 30
doubts that Fed action was expansion of the early and mid- percent. As prices then tumbled
as inflationary as Rothbard 1920s are of one view about throughout the economy, the
believed, pointing to relatively what happened next: The central Fed’s higher interest rate policy
flat commodity and consumer bank presided over a dramatic boosted real (inflation-adjusted)
prices in the 1920s as evidence contraction of the money supply rates dramatically.
that monetary policy was not so that began late in the decade. The
wildly irresponsible. federal government’s responses Th e m o s t c o m p r e h e n s i v e
to the resulting recession took chronicle of the monetar y
Substantial cuts in high a bad situation and made it far, policies of the period can be
marginal income tax rates in far worse. found in the classic work of Nobel
the Coolidge years certainly Laureate Milton Friedman and
helped the economy and may his colleague Anna Schwartz,
have ameliorated the price The Bottom Drops Out “A Monetary History of the United
e f f e c t o f Fe d p o l i c y. Ta x By 1928, the Federal Reserve States”, 1867-1960. Friedman and
reductions spurred investment was raising interest rates and Schwartz argue conclusively that
and real economic growth, choking off the money supply. the contraction of the nation’s
which in turn yielded a burst of For example, its discount rate money supply by one-third
technological advancement and (the rate the Fed charges member between August 1929 and March
entrepreneurial discoveries of banks for loans) was increased 1933 was an enormous drag on
cheaper ways to produce goods. four times, from 3.5 percent to the economy and largely the result
This explosion in productivity 6 percent, between January 1928 of seismic incompetence by the
undoubtedly helped to keep and August 1929. The central Fed. The death in October 1928
Mackinac Center for Public Policy | Great Myths of the Great Depression 4

of Benjamin Strong, a powerful Then, on October 3, political forces for higher trade-
figure who had exerted great stocks suffered their worst damaging tariffs were making
influence as head of the Fed’s pummeling of the ye ar. gains on Capitol Hill.
New York district bank, left the Margin calls went out; some
Fed floundering without capable traders grew apprehensive. The stock market crash was only a
leadership — making bad policy But the next day, prices rose reflection — not the direct cause
even worse.5 again and thereafter seesawed — of the destructive government
for a fortnight. policies that would ultimately
At first, only the “smart” money produce the Great Depression:
— the Bernard Baruchs and the The real crunch began on The market rose and fell in almost
Joseph Kennedys who watched Wednesday, October 23, with direct synchronization with what
things like money supply and what one observer called “a the Fed and Congress were doing.
other government policies — Niagara of liquidation.” Six And what they did in the 1930s
saw that the party was coming million shares changed hands. ranks way up there in the annals
to an end. Baruch actually The industrial average fell 21 of history’s greatest follies.
began selling stocks and buying points. “Tomorrow, the turn
bonds and gold as early as will come,” brokers told one
Buddy, Can You
1928; Kennedy did likewise, another. Prices, they said, had
commenting, “only a fool holds been carried to “unreasonably Spare $20 Million?
out for the top dollar.”6 low” levels. Black Thursday shook Michigan
harder than almost any other
The masses of investors But the next day, Black state. Stocks of auto and mining
eventually sensed the change Thursday, stocks were dumped companies were hammered. Auto
a t t h e Fe d a n d t h e n t h e in even heavier selling ... the production in 1929 reached an
stampede began. In a special ticker fell behind more than all-time high of slightly more
issue commemorating the 50th 5 hours, and finally stopped than 5 million vehicles, then
anniversary of the stock market grinding out quotations at quickly slumped by 2 million in
collapse, U.S. News & World 7:08 p.m.7 1930. By 1932, near the deepest
Report described it this way: point of the Depression, they had
At their peak, stocks in the Dow fallen by another 2 million to just
Actually the Great Crash Jones Industrial Average were 1,331,860 — down an astonishing
was by no means a one- selling for 19 times earnings 75 percent from the 1929 peak.
day affair, despite frequent — somewhat high, but hardly
references to Black Thursday, what stock market analysts Thousands of investors
October 24, and the following regard as a sign of inordinate everywhere, including many
week’s Black Tuesday. As speculation. The distortions in well-known people, were hit
early as September 5, stocks the economy promoted by the hard in the 1929 crash. Among
were weak in heavy trading, Fed’s monetary policy had set the them was Winston Churchill.
after having moved into new country up for a recession, but He had invested heavily in
high ground two days earlier. other impositions to come would American stocks before the crash.
Declines in early October soon turn the recession into a Afterward, only his writing skills
were calle d a “desirable full-scale disaster. As stocks took and positions in government
correction.” The Wall Street a beating, Congress was playing restored his finances.
Journal, predicting an autumn with fire: On the very morning
rally, noted that “some stocks of Black Thursday, the nation’s Clarence Birdseye, an early
rise, some fall.” newspapers reported that the developer of packaged frozen
Mackinac Center for Public Policy | Great Myths of the Great Depression 5

foods, had sold his business for

$30 million and put all his money
into stocks. He was wiped out.

William C. Durant, founder

of General Motors, lost more
than $40 million in the stock
market and wound up a virtual
pauper. (GM itself stayed in the
black throughout the Depression
under the cost-cutting leadership
of Alfred P. Sloan.)

President Herbert Hoover is mistakenly presented in standard history texts as a laissez-

PhaSe II: faire president, but he signed into law so many costly and foolish bills that one of Franklin
Disintegration of the Roosevelt’s top aides later said that “practically the whole New Deal was extrapolated from
programs that Hoover started.”
World Economy
Though modern myth claims that free-market philosophy? His 1930. It came on top of the
the free market “self-destructed” opponent in the 1932 election, Fordney-McCumber Tariff of
in 1929, government policy was Franklin Ro ose velt , didn’t 1922, which had already put
the debacle’s principal culprit. If think so. During the campaign, American agriculture in a tailspin
this crash had been like previous Roosevelt blasted Hoover for during the preceding decade. The
ones, the hard times would have spending and taxing too much, most protectionist legislation
ended in two or three years at boosting the national debt, in U.S. history, Smoot-Hawley
the most, and likely sooner than choking off trade, and putting virtually closed the borders
that. But unprecedented political millions on the dole. He accused to foreign goods and ignited
bungling instead prolonged the the pre sident of “re ckle ss a vicious international trade
misery for over 10 years. and extravagant” spending, war. Professor Barry Poulson
of thinking “that we ought to describes the scope of the act:
Unemployment in 1930 averaged center control of everything
a mildly recessionary 8.9 percent, in Washington as rapidly as The act raised the rates on
up from 3.2 percent in 1929. It possible,” and of presiding the entire range of dutiable
shot up rapidly until peaking out over “the greatest spending commodities; for example,
at more than 25 percent in 1933. administration in peacetime the average rate increased
Until March of 1933, these were in all of history.” Roosevelt’s from 20 percent to 34 percent
the years of President Herbert running mate, John Nance on agricultural products;
Hoover — a man often depicted as Garner, charged that Hoover from 36 percent to 47
a champion of noninterventionist, was “leading the country down percent on wines, spirits,
laissez-faire economics. the path of socialism.”8 Contrary and beverages; from 50 to 60
to the conventional view about percent on wool and woolen
Hoover, Roosevelt and Garner manufactures. In all, 887
“ThE gReatest spendinG
were absolutely right. tariffs were sharply increased
administration in
and the act broadened the list
all of history” The crowning folly of the Hoover of dutiable commodities to
Did Hoover really subscribe administration was the Smoot- 3,218 items. A crucial part
to a “hands-off-the-economy,” Hawley Tariff, passed in June of the Smoot-Hawley Tariff
Mackinac Center for Public Policy | Great Myths of the Great Depression 6

was that many tariffs were for nearly a third of their markets.
a specific amount of money Farm prices plummeted and tens
rather than a percentage of of thousands of farmers went
the price. As prices fell by bankrupt. A bushel of wheat that
half or more during the Great sold for $1 in 1929 was selling for
Depression, the effective a mere 30 cents by 1932.
rate of these specific tariffs
double d, incre a sing the With the collapse of agriculture,
protection afforded under rural banks failed in record
the act.9 numbers , dragging down
hundreds of thousands of their
Smoot-Hawley was as broad as it customers. Nine thousand banks
was deep, affecting a multitude closed their doors in the United
of products. Before its passage, States between 1930 and 1933.
Americans voted for Franklin Roosevelt
clocks had faced a tariff of 45 The stock market, which had
in 1932 expecting him to adhere to the
percent; the act raised that to Democratic Party platform, which called for regained much of the ground
55 percent, plus as much as less government spending and regulation. it had lost since the previous
another $4.50 per clock. Tariffs October, tumbled 20 points on
on corn and butter were roughly solve the nagging unemployment the day Hoover signed Smoot-
doubled. Even sauerkraut was problem. But they ignored Hawley into law, and fell almost
tariffed for the first time. Among an imp or tant pr inciple of without respite for the next
the few remaining tariff-free international commerce: Trade two years. (The market’s high,
goods, strangely enough, were is ultimately a two-way street; as measured by the Dow Jones
leeches and skeletons (perhaps if foreigners cannot sell their Industrial Average, was set on
as a political sop to the American goods here, then they cannot Sept. 3, 1929, at 381. It hit its
Medical Association, as one wag earn the dollars they need to 1929 low of 198 on Nov. 13, then
wryly remarked). buy here. Or, to put it another rebounded to 294 by April 1930.
way, government cannot shut off It declined again as the tariff bill
Tariffs on linseed oil, tungsten, imports without simultaneously made its way toward Hoover’s
and casein hammered the U.S. shutting off exports. desk in June and did not bottom
paint, steel and paper industries, out until it reached a mere 41 two
respectively. More than 800 items years later. It would be a quarter-
used in automobile production You Tax Me, I Tax You century before the Dow would
were taxed by Smoot-Hawley. Foreign companies and their climb to 381 again.)
Most of the 60,000 people workers were f lattene d by
employed in U.S. plants making Smoot-Hawley’s steep tariff rates The shrinkage in world trade
cheap clothing out of imported and foreign governments soon brought on by the tariff wars
wool rags went home jobless retaliated with trade barriers helped set the stage for World
after the tariff on wool rags rose of their own. With their ability War II a few years later. In 1929, the
by 140 percent.10 to sell in the American market rest of the world owed American
severely hampered, they curtailed citizens $30 billion. Germany’s
Officials in the administration their purchases of American Weimar Republic was struggling
and in Congress believed that goods. American agriculture to pay the enormous reparations
raising trade barriers would force was particularly hard hit. With bill imposed by the disastrous
Americans to buy more goods a stroke of the presidential pen, Treaty of Versailles. When tariffs
made at home, which would farmers in this country lost made it nearly impossible for
Mackinac Center for Public Policy | Great Myths of the Great Depression 7

foreign businessmen to sell their government’s share of GNP

goods in American markets, soared from 16.4 percent to 21.5
the burden of their debt s percent.12 Hoover’s agricultural
became massively heavier and bureaucracy doled out hundreds
emboldened demagogues like of millions of dollars to wheat
Adolf Hitler. “When goods don’t and cotton farmers even as
cross frontiers, armies will,” warns the new tariffs wiped out their
an old but painfully true maxim. markets. His Reconstruction
Finance Corporation ladled
out billions more in business
Free Markets or
subsidies. Commenting decades
Free Lunches? later on Hoover’s administration,
Smoot-Hawley by itself should Rexford Guy Tugwell, one of the
lay to rest the myth that Hoover architects of Franklin Roosevelt’s
was a free market practitioner, policies of the 1930s, explained,
but there is even more to the “We didn’t admit it at the time, but
story of his administration’s practically the whole New Deal President Franklin Roosevelt decried
interventionist mistakes. Within was extrapolated from programs as selfish “economic royalists” those
businessmen who opposed the burdensome
a month of the stock market that Hoover started.”13 taxes and regulations of his “New Deal.”
crash, he convened conferences
of business leaders for the Though Hoover at first did lower Compounding the error of
purpose of jawboning them into taxes for the poorest of Americans, high tariffs, huge subsidies and
keeping wages artificially high Larry Schweikart and Michael deflationary monetary policy,
even though both profits and Allen in their sweeping “A Patriot’s Congress then passe d and
prices were falling. Consumer History of the United States: From Hoover signed the Revenue Act
prices plunged almost 25 percent Columbus’s Great Discovery to of 1932. The largest tax increase
between 1929 and 1933 while the War on Terror” stress that in peacetime history, it doubled
nominal wages on average he “offered no incentives to the the income tax. The top bracket
decreased only 15 percent — wealthy to invest in new plants to actually more than doubled,
translating into a substantial stimulate hiring.” He even taxed soaring from 24 percent to
increase in wages in real terms, bank checks, “which accelerated 63 percent. Exemptions were
a major component of the cost the decline in the availability of lowered; the earned income
of doing business. As economist money by penalizing people for credit was abolished; corporate
Richard Ebeling notes, “The writing checks.”14 and estate taxes were raised;
‘high-wage’ policy of the Hoover new gift, gasoline and auto taxes
administration and the trade In September 1931, with the were imposed; and postal rates
unions ... succeeded only in money supply tumbling and were sharply hiked.
pricing workers out of the labor the economy reeling from the
market, generating an increasing impact of Smoot-Hawley, the Can any serious scholar observe the
circle of unemployment.”11 Fed imposed the biggest hike Hoover administration’s massive
in its discount rate in history. economic intervention and, with
Hoover dramatically increased Bank deposits fell 15 percent a straight face, pronounce the
g o v e r n m e nt s p e n d i n g f o r within four months and sizable, inevitably deleterious effects as the
subsidy and relief schemes. In deflationary declines in the fault of free markets? Schweikart
the space of one year alone, nation’s money supply persisted and Allen survey some of the
from 1930 to 1931, the federal through the first half of 1932. wreckage:
Mackinac Center for Public Policy | Great Myths of the Great Depression 8

By 1933, the numbers the sort of difference for which

produced by this comedy the countr y had hoped. He
of errors were staggering: started off on the wrong foot
national unemploy ment when, in his inaugural address,
rates reached 25 percent, but he blamed the Depression on
within some individual cities, “unscrupulous money changers.”
the statistics seemed beyond He said nothing about the role
comprehension. Cleveland of the Fed’s mismanagement
reported that 50 percent of its and little about the follies of
labor force was unemployed; To many Americans, the National Recovery Congress that had contributed
Toledo, 80 percent; and some Administration’s bureaucracy and mind- to the problem. As a result of
states even averaged over 40 numbing regulations became known as the his efforts, the economy would
“National Run Around.”
percent. Because of the dual- linger in depression for the
edged sword of declining budget, a sound gold currency “to rest of the decade. Adapting a
revenues and increasing be preserved at all hazards,” the phrase from 19th century writer
welfare demands, the burden removal of government from areas Henry David Thoreau, Roosevelt
on the cities pushed many that belonged more appropriately famously declared in his address
municipalities to the brink. to private enterprise and an end that, “We have nothing to fear
Schools in New York shut to the “extravagance” of Hoover’s but fear itself.” But as Dr. Hans
down, and teachers in Chicago farm programs. This is what Sennholz of Grove City College
were owed some $20 million. candidate Roosevelt promised, explains, it was FDR’s policies
Private schools, in many but it bears no resemblance to to come that Americans had
cases, failed completely. One what President Roosevelt actually genuine reason to fear:
government study found that delivered.
by 1933 some fifteen hundred In his first 100 days, he swung
colleges had gone belly-up, Washington was rife with both hard at the profit order.
and book sales plummeted. fear and optimism as Roosevelt Instead of clearing away the
Chicago’s library system did was sworn in on March 4, 1933 — prosperity barriers erected
not purchase a single book in fear that the economy might not by his predecessor, he built
a year-long period.15 recover and optimism that the new new ones of his own. He
and assertive president just might struck in every known way
make a difference. Humorist Will at the integrity of the U.S.
Phase III: The New Deal Rogers captured the popular feeling dollar through quantitative
Franklin Delano Roosevelt won toward FDR as he assembled the increases and qualitative
the 1932 presidential election in a new administration: “The whole deterioration. He seized the
landslide, collecting 472 electoral country is with him, just so he does people’s gold holdings and
votes to just 59 for the incumbent something. If he burned down the subsequently devalued the
Herbert Hoover. The platform Capitol, we would all cheer and say, dollar by 40 percent.17
of the Democratic Party, whose well, we at least got a fire started
ticket Roosevelt headed, declared, anyhow.”16 Frustrated and angered that
“We believe that a party platform Roosevelt had so quickly and
is a covenant with the people to thoroughly abandoned the
“Nothing to fear
be faithfully kept by the party platform on which he was
entrusted with power.” It called for but fear itself” elected, Director of the Bureau
a 25 percent reduction in federal Roosevelt did indeed make a of the Budget Lewis W. Douglas
spending, a balanced federal difference, though probably not resigned after only one year on
Mackinac Center for Public Policy | Great Myths of the Great Depression 9

the job. At Harvard University

in May 1935, Douglas made it
plain that America was facing a
momentous choice:

Will we choose to subject

ourselves — this great
country — to the despotism
of bureaucracy, controlling
our every act, destroying what
equality we have attained,
reducing us eventually to the
condition of impoverished
slaves of the state? Or will we This 1989 photo is of a bridge built from 1936-41 as part of a Works Progress Administration
(WPA) project in Coleman County, Texas. Many Americans saw such projects as helpful,
cling to the liberties for which without considering their high cost and the corruption that plagued the program.
man has struggled for more
than a thousand years? It is “banking holiday” on March He points out that “Almost all
important to understand the 6 (which did not completely the failed banks were in states
magnitude of the issue before end until nine days later) is still with unit banking laws” — laws
us. ... If we do not elect to hailed as a decisive and necessary that prohibited banks from
have a tyrannical, oppressive action by Roosevelt apologists. opening branches and thereby
bureaucracy controlling our Friedman and Schwartz, however, diversifying their portfolios and
lives, destroying progress, make it plain that this supposed reducing their risks. Powell
depressing the standard cure was “worse than the disease.” writes: “Although the United
of living ... then should it The Smoot-Hawley tariff and the States, with its unit banking laws,
not be the function of the Fed’s unconscionable monetary had thousands of bank failures,
Federal government under mischief were primary culprits Canada, which permitted branch
a democracy to limit its in producing the conditions that banking, didn’t have a single
activities to those which a gave Roosevelt his excuse to failure ...”20 Strangely, critics of
democracy may adequately temporarily deprive depositors capitalism who love to blame the
deal, such for example as of their money, and the bank market for the Depression never
national defense, maintaining holiday did nothing to alter those mention that fact.
law and order, protecting fundamentals. “More than 5,000
life and property, preventing banks still in operation when Congress gave the president the
dishonesty, and ... guarding the holiday was declared did power first to seize the private
the public against ... vested not reopen their doors when it gold holdings of American
special interests?18 ended, and of these, over 2,000 citizens and then to fix the
never did thereafter,” report price of gold. One morning, as
Friedman and Schwartz.19 Roosevelt ate eggs in bed, he
New Dealing from the
and Secretary of the Treasury
Bottom of the Deck Economist Jim Powell of the Cato Henry Morgenthau decided
Crisis gripped the banking Institute authored a splendid to change the ratio between
system when the new president book on the Great Depression gold and paper dollars. After
assumed office on March 4, 1933. in 2003, titled “FDR’s Folly: How weighing his options, Roosevelt
Roosevelt’s action to close the Roosevelt and His New Deal settled on a 21 cent price hike
banks and declare a nationwide Prolonged the Great Depression”. because “it’s a lucky number.”
Mackinac Center for Public Policy | Great Myths of the Great Depression 10

In his diary, Morgenthau wrote, and imposing the nation’s first

“If anybody ever knew how comprehensive minimum wage
we really set the gold price law in 1938. While to this day
through a combination of lucky he gets a great deal of credit for
numbers, I think they would these two measures from the
be frightened.”21 Roosevelt also general public, many economists
single-handedly torpedoed the have a different perspective. The
London Economic Conference minimum wage law prices many of
in 1933, which was convened the inexperienced, the young, the
at the request of other major unskilled and the disadvantaged
nations to bring down tariff rates out of the labor market. (For
and restore the gold standard. example, the minimum wage
provisions passed as part of
Washington and its reckless Michigan Senator Arthur Vandenberg
another act in 1933 threw an
central bank had already made argued that a sound economy could not be estimated 500,000 blacks out
mincemeat of the gold standard restored through FDR’s punitive tax and of work).24 And current studies
regulatory measures.
by the early 1930s. Roosevelt’s and estimates reveal that Social
rejection of it removed most of Prohibition. The House approved Security has become such a long-
the remaining impediments to a repeal measure on Tuesday, the term actuarial nightmare that it
limitless currency and credit Senate passed it on Thursday and will either have to be privatized or
expansion, for which the nation before the year was out, enough the already high taxes needed to
would pay a high price in later states had ratified it so that the keep it afloat will have to be raised
years in the form of a depreciating 21st Amendment became part of to the stratosphere.
currency. Sen. Carter Glass put it the Constitution. One observer,
well when he warned Roosevelt commenting on this remarkable Roosevelt secured passage of
in early 1933: “It’s dishonor, sir. turn of events, noted that of two the Agricultural Adjustment
This great government, strong in men walking down the street at Act, which levied a new tax
gold, is breaking its promises to the start of 1933 — one with a on agricultural processors and
pay gold to widows and orphans gold coin in his pocket and the used the revenue to supervise
to whom it has sold government other with a bottle of whiskey in the wholesale destr uction
bonds with a pledge to pay gold his coat — the man with the coin of valuable crops and cattle.
coin of the present standard of would be an upstanding citizen Federal agents oversaw the ugly
value. It is breaking its promise to and the man with the whiskey spectacle of perfectly good fields
redeem its paper money in gold would be the outlaw. A year later, of cotton, wheat and corn being
coin of the present standard of precisely the reverse was true. plowed under (the mules had
value. It’s dishonor, sir.”22 to be convinced to trample the
In the first year of the New Deal, crops; they had been trained, of
Though he seized the country’s Roosevelt proposed spending $10 course, to walk between the rows).
gold, Roosevelt did return billion while revenues were only Healthy cattle, sheep and pigs were
booze to America’s bars and $3 billion. Between 1933 and 1936, slaughtered and buried in mass
parlor rooms. On his second government expenditures rose by graves. Secretary of Agriculture
Sunday in the White House, he more than 83 percent. Federal debt Henry Wallace personally gave
remarked at dinner, “I think this skyrocketed by 73 percent. the order to slaughter 6 million
would be a good time for beer.”23 baby pigs before they grew to
That same night, he drafted a FDR talke d Congress into full size. The administration also
message asking Congress to end creating Social Security in 1935 paid farmers for the first time
Mackinac Center for Public Policy | Great Myths of the Great Depression 11

for not working at all. Even if

the AAA had helped farmers by
curtailing supplies and raising
prices, it could have done so only
by hurting millions of others who
had to pay those prices or make do
with less to eat.

Blue Eagles, Red Ducks

Perhaps the most radical aspect
of the New Deal was the National
Industrial Recovery Act, passed
in June 1933, which created At the nadir of the Great Depression, half of American industrial production was idle as the
economy reeled under the weight of endless and destructive policies from both Republicans
a massive new bureaucracy and Democrats in Washington.
called the National Recovery
Administration. Under the NRA, dropped 25 percent. Benjamin to the manufacture of corsets
most manufacturing industries M. Anderson writes, “NRA was and brassieres, covering more
were suddenly forced into not a revival measure. It was an than 2 million employers and
government-mandated cartels. antirevival measure. ... Through 22 million workers.” 26 There
Codes that regulated prices and the whole of the NRA period were codes for the production
terms of sale briefly transformed industrial production did not of hair tonic, dog leashes, and
much of the American economy rise as high as it had been in July even musical comedies. A New
into a fascist-style arrangement, 1933, before NRA came in.”25 Jersey tailor named Jack Magid
while the NRA was financed by was arrested and sent to jail for
new taxes on the very industries The man Roosevelt picked the “crime” of pressing a suit
it controlled. Some economists to direct the NRA effort was of clothes for 35 cents rather
have estimated that the NRA General Hugh “Iron Pants” than the NRA-inspired “Tailor’s
boosted the cost of doing business Johnson, a profane, red-faced Code” of 40 cents.
by an average of 40 percent — not bully and professed admirer of
something a depressed economy Italian dictator Benito Mussolini. In “The Roosevelt Myth”, historian
needed for recovery. Thundere d Johnson, “May John T. Flynn described how
Almighty God have mercy on the NRA’s partisans sometimes
The economic impact of the NRA anyone who attempts to interfere conducted “business”:
was immediate and powerful. with the Blue Eagle” (the official
In the five months leading up symbol of the NRA, which one The NRA was discovering
to the act’s passage, signs of senator derisively referred to as it could not enforce it s
recovery were evident: factory the “Soviet duck”). Those who rules. Black markets grew
employment and payrolls had refused to comply with the NRA up. Only the most violent
increased by 23 and 35 percent, Johnson personally threatened police methods could procure
respectively. Then came the NRA, with public boycotts and “a enforcement . In Sidne y
shortening hours of work, raising punch in the nose.” Hillman’s garment industry
wages arbitrarily and imposing the code authority employed
other new costs on enterprise. There were ultimately more than enforcement police. They
In the six months after the law 500 NRA codes, “ranging from roamed through the garment
took effect, industrial production the production of lightning rods district like storm troopers.
Mackinac Center for Public Policy | Great Myths of the Great Depression 12

They could enter a man’s his State of the Union message

factory, send him out, line up that any new such program
his employees, subject them would be abolished within a
to minute interrogation, take year. “The federal government,”
over his books on the instant. said the president, “must and
Night work was forbidden. shall quit this business of relief.
Flying squadrons of these I am not willing that the vitality
private coat-and-suit police of our people be further stopped
went through the district at by the giving of cash, of market
night, battering down doors T he S u pre m e Co u rt c a m e u n d e r baskets, of a few bits of weekly
attack by President Roosevelt because it
with axes looking for men declared important parts of the “New Deal”
work cutting grass , raking
who were committing the unconstitutional. FDR’s “court-packing” leaves, or picking up papers
crime of sewing together a scheme contributed to the resumption of in the public parks.” Harr y
economic depression in 1937.
pair of pants at night. But Hopkins was put in charge of
without these harsh methods people need to be regimented by the agency and later said, “I’ve
many code authorities said powerful overlords in order to got four million at work but for
there could be no compliance be saved.”29 God’s sake, don’t ask me what
because the public was not they are doing.” The CWA came
back of it.27 Alphabet commissars spent to an end within a few months
the public’s money like it was but was replaced with another
so much bilge. They were what te mp o r a r y rel i e f p ro g r a m
The Alphabet influential journalist and social that evolved into the Works
Commissars critic Albert Jay Nock had in Progress Administration, or
Roosevelt next signed into law mind when he described the WPA , by 1935. It is known
steep income tax increases on the New Deal as “a nation-wide, today as the very government
higher brackets and introduced State-managed mobilization of pro g ram that g ave r i s e to
a 5 percent withholding tax inane buffoonery and aimless the new term, “boondoggle,”
on corporate dividends. He commotion.”30 because it “produced” a lot
secured another tax increase in more than the 77,000 bridges
1934. In fact, tax hikes became R o o s e v e l t ’s C i v i l Wo r k s and 116,000 buildings to which
a favorite policy of Roosevelt for Administration hired actors to its advocates loved to point as
the next 10 years, culminating give free shows and librarians evidence of its efficacy.31
in a top income tax rate of 90 to catalog archives. It even
percent. Sen. Arthur Vandenberg paid researchers to study the With good reason, critics often
of Michigan, who opposed much history of the safety pin, hired referred to the WPA as “We Piddle
of the New Deal, lambasted 100 Washington workers to Around.” In Kentucky, WPA
Roosevelt’s massive tax increases. patrol the streets with balloons workers catalogued 350 different
A sound economy would not be to frighten starlings away from ways to cook spinach. The agency
restored, he said, by following public buildings, and put men employed 6,000 “actors” though
the socialist notion that America on the public payroll to chase the nation’s actors’ union claimed
could “lift the lower one-third tumbleweeds on windy days. only 4,500 members. Hundreds
up” by pulling “the upper two- of WPA workers were used to
thirds down.”28 Vandenberg also The CWA, when it was started collect campaign contributions
condemned “the congressional in the fall of 1933, was supposed for Democratic Party candidates.
surrender to alphabet commissars to be a short-lived jobs program. In Tennessee, WPA workers
who deeply believe the American Roosevelt assured Congress in were fired if they refused to
Mackinac Center for Public Policy | Great Myths of the Great Depression 13

donate 2 percent of their wages hires someone to catalog the

to the incumbent governor. By many ways of cooking spinach, his
1941, only 59 percent of the tax-supported paycheck cannot
WPA budget went to paying be counted as a net increase
workers anything at all; the rest to the economy because the
was sucked up in administration wealth used to pay him was
and overhead. The editors of simply diverted, not created.
The New Republic asked, “Has Economists today must still battle
[Roosevelt] the moral stature to this “magical thinking” every time
admit now that the WPA was more government spending is Special powers granted to organized
a hasty and grandiose political proposed — as if money comes labor with the passage of the Wagner Act
contributed to a wave of militant strikes and a
gesture, that it is a wretched not from productive citizens, but “depression within a depression” in 1937.
failure and should be abolished?”32 rather from the tooth fairy.
The last of the WPA’s projects was ‘a gang of half-educated peda-
not eliminated until July of 1943. gogues, nonconstitutional
“An astonishing lawyers, starry-eyed uplifters
Roosevelt has been lauded for rabble of impudent and other such sorry wizards.’
his “job-creating” acts such as nobodies” His New Deal was a ‘political
the CWA and the WPA. Many Roosevelt’s haphazard economic racket,’ a ‘series of stupendous
people think that they helped re- interventions garnered credit from bogus miracles,’ with its ‘con-
lieve the Depression. What they people who put high value on the stant appeals to class envy
fail to realize is that it was the appearance of being in charge and and hatred,’ treating govern-
rest of Roosevelt’s tinkering that “doing something.” Meanwhile, the ment as ‘a milch-cow with
prolonged the Depression and great majority of Americans were 125 million teats’ and marked
which largely prevented the job- patient. They wanted very much to by ‘frequent repudiations of
less from finding real jobs in the give this charismatic polio victim categorical pledges.’33
first place. The stupefying roster and former New York governor the
of wasteful spending generated benefit of the doubt. But Roosevelt
by these jobs programs repre- always had his critics, and they Signs of Life
sented a diversion of valuable would grow more numerous as the The American economy was soon
resources to politically motivated years groaned on. One of them was relieved of the burden of some
and economically counterpro- the inimitable “Sage of Baltimore,” of the New Deal’s worst excesses
ductive purposes. H. L. Mencken, who rhetorically when the Supreme Court outlawed
threw everything but the kitchen the NRA in 1935 and the AAA in
A brief analogy will illustrate sink at the president. Paul Johnson 1936, earning Roosevelt’s eternal
this point. If a thief goes house sums up Mencken’s stinging but wrath and derision. Recognizing
to house robbing everybody in often-humorous barbs this way: much of what Roosevelt did as
the neighborhood, then heads unconstitutional, the “nine old
off to a nearby shopping mall Mencken excelled himself men” of the Court also threw
to spend his ill-gotten loot, it is in attacking the triumphant out other, more minor acts
not assumed that because his FDR, whose whiff of fraudu- and programs which hindered
spending “stimulated” the stores at lent collectivism filled him recovery.
the mall he has thereby performed with genuine disgust. He was
a national service or provided the ‘Fuhrer,’ the ‘Quack,’ sur- Freed from the worst of the New
a general economic benefit. rounded by ‘an astonishing Deal, the economy showed some
Likewise, when the government rabble of impudent nobodies,’ signs of life. Unemployment
Mackinac Center for Public Policy | Great Myths of the Great Depression 14

dropped to 18 percent in 1935, NRA and its labor codes. It against business. Businessmen,
14 percent in 1936, and even aimed at crushing all employ- Roosevelt fumed, were obstacles
lower in 1937. But by 1938, it er resistance to labor unions. on the road to recovery. He blasted
was back up to nearly 20 percent Anything an employer might them as “economic royalists” and
as the economy slumped again. do in self-defense became an said that businessmen as a class
The stock market crashed nearly “unfair labor practice” punish- were “stupid.”36 He followed up the
50 percent between August able by the Board. The law not insults with a rash of new punitive
1937 and March 1938. The only obliged employers to deal measures. New strictures on the
“economic stimulus” of Franklin and bargain with the unions stock market were imposed. A tax
Delano Roosevelt’s New Deal designated as the employees’ on corporate retained earnings,
had achieved a real “first”: a representative; later Board de- called the “undistributed profits
depression within a depression! cisions also made it unlawful tax,” was levied. “These soak-the-
to resist the demands of labor rich efforts,” writes economist
union leaders.34 Robert Higgs, “left little doubt
Phase IV: that the president and his
The Wagner Act Armed with these sweeping administration intended to push
The stage was set for the 1937-38 new powers, labor unions went through Congress everything
collapse with the passage of the on a militant organizing frenzy. they could to extract wealth
National Labor Relations Act Threats , boycotts , strikes , from the high-income earners
in 1935 — better known as the seizures of plants and widespread responsible for making the bulk
“Wagner Act” and organized violence pushed productivity of the nation’s decisions about
labor’s “Magna Carta.” To quote down sharply and unemployment private investment.”37
Sennholz again: up dramatically. Membership in
the nation’s labor unions soared: During a period of barely two
This law re volutionized By 1941, there were two and a months during late 1937, the
American labor relations. It half times as many Americans market for steel — a key economic
took labor disputes out of the in unions as had been the case barometer — plummeted from 83
courts of law and brought in 1935. Historian William E. percent of capacity to 35 percent.
them under a newly created Leuchtenburg, himself no friend When that news emblazoned
Federal agency, the National of free enterprise, observed, headlines, Roosevelt took an
Labor Relations Board, which “Property-minded citizens were ill-timed nine-day fishing trip.
became prosecutor, judge, and scared by the seizure of factories, The New York Herald-Tribune
jury, all in one. Labor union incensed when strikers interfered implored him to get back to work
sympathizers on the Board with the mails, vexed by the to stem the tide of the renewed
further perverted this law, intimidation of nonunionists, Depression. What was needed,
which already afforded legal and alarmed by flying squadrons said the newspaper’s editors, was
immunities and privileges to of workers who marched, or a reversal of the Roosevelt policy
labor unions. The U.S. thereby threatened to march, from city “of bitterness and hate, of setting
abandoned a great achievement to city.”35 class against class and punishing
of Western civilization, equality all who disagreed with him.”38
under the law.
An Unfriendly Climate Columnist Walter Lippmann
The Wagner Act, or National for Business wrote in March 1938 that “with
Labor Relations Act, was From the White House on the almost no important exception
passed in reaction to the heels of the Wagner Act came every measure he [Roosevelt] has
Supreme Court’s voidance of a thunderous barrage of insults been interested in for the past
Mackinac Center for Public Policy | Great Myths of the Great Depression 15

five months has been to reduce on the nation’s banks. Experience the war effort instead of into plant
or discourage the production of has shown time and again that a expansion or consumer goods.
wealth.”39 roller-coaster monetary policy Not until both Roosevelt and the
is enough by itself to produce a war were gone did investors feel
As pointed out earlier in this roller-coaster economy. confident enough to “set in motion
essay, Herbert Hoover’s own the postwar investment boom that
version of a “New Deal” had hiked Still stinging from his earlier powered the economy’s return to
the top marginal income tax rate Supreme Court defeats, Roosevelt sustained prosperity.”42
from 24 to 63 percent in 1932. tried in 1937 to “pack” the Supreme
But he was a piker compared to Court with a proposal to allow the This view gains support in these
his tax-happy successor. Under president to appoint an additional comments from one of the country’s
Roosevelt, the top rate was raised justice to the Court for every leading investors of the time,
at first to 79 percent and then later sitting justice who had reached the Lammot du Pont, offered in 1937:
to 90 percent. Economic historian age of 70 and did not retire. Had
Burton Folsom notes that in this proposal passed, Roosevelt Uncertainty rules the tax
1941 Roosevelt even proposed a could have appointed six new situation, the labor situation,
whopping 99.5-percent marginal justices favorable to his views, the monetary situation, and
rate on all incomes over $100,000. increasing the members of the practically every legal condition
“Why not?” he said when an Court from 9 to 15. His plan failed under which industry must
advisor questioned the idea.40 in Congress, but the Court later operate. Are taxes to go higher,
began rubber-stamping his policies lower or stay where they are?
After that confiscatory proposal after a number of opposing justices We don’t know. Is labor to be
failed, Roosevelt issued an retired. Until Congress killed union or non-union? . . . Are we
executive order to tax all income the packing scheme, however, to have inflation or deflation,
over $25,000 at the astonishing business fears that a Court more government spending or
rate of 100 percent. He also sympathetic to Roosevelt’s goals less? ... Are new restrictions to
promoted the lowering of the would endorse more of the old be placed on capital, new limits
personal exemption to only New Deal prevented investment on profits? ... It is impossible to
$600, a tactic that pushed most and confidence from reviving. even guess at the answers.”43
American families into paying at
least some income tax for the first Economic historian Robert Higgs Many modern historians tend
time. Shortly thereafter, Congress draws a close connection between to be reflexively anti-capitalist
rescinded the executive order, but the level of private investment and distrustful of free markets;
went along with the reduction of and the course of the American they find Roosevelt’s exercise of
the personal exemption.41 economy in the 1930s. The power, constitutional or not, to
relentless assaults of the Roosevelt be impressive and historically
Meanwhile, the Federal Reserve administration — in both word and “interesting .” In sur veys, a
again seesawed its monetary deed — against business, property, majority consistently rank
policy in the mid-1930s, first and free enterprise guaranteed FDR near the top of the list for
up then down, then up sharply that the capital needed to jump- presidential greatness, so it is
through America’s entry into start the economy was either taxed likely they would disdain the
World War II. Contributing to the away or forced into hiding. When notion that the New Deal was
economic slide of 1937 was this FDR took America to war in 1941, responsible for prolonging the
fact: From the summer of 1936 he eased up on his anti-business Great Depression. But when a
to the spring of 1937, the Fed agenda, but a great deal of the nationally representative poll
doubled reserve requirements nation’s capital was diverted into by the American Institute of
Mackinac Center for Public Policy | Great Myths of the Great Depression 16

Public Opinion in the spring less government. He instead gave policies included a litany of
of 1939 asked, “Do you think Americans more government, political missteps: central bank
the attitude of the Roosevelt but he did so with fanfare and mismanagement, trade-crushing
administration toward business fireside chats that mesmerized tariffs, incentive-sapping taxes,
is delaying business recovery?” the a desperate people. By the time mind-numbing controls on
American people responded “yes” they began to realize that his production and competition,
by a margin of more than 2-to-1. policies were harmful, World senseless destruction of crops
The business community felt even War II came, the people rallied and cattle and coercive labor
more strongly so.44 around their commander-in- laws, to recount just a few. It
chief, and there was little desire was not the free market that
In his private diary, FDR’s very to change the proverbial horse produced 12 years of agony;
own Treasury Secretary, Henry in the middle of the stream by rather, it was political bungling
Morgenthau, seemed to agree. He electing someone new. on a grand scale.
wrote: “We have tried spending
money. We are spending more Along with the holocaust of Those who can survey the events
than we have ever spent before World War II came a revival of of the 1920s and 1930s and
and it does not work. ... We trade with America’s allies. The blame free-market capitalism
have never made good on our war’s destruction of people and for the economic calamity have
promises. ... I say after eight years resources did not help the U.S. their eyes, ears and minds firmly
of this Administration we have economy, but this renewed trade closed to the facts. Changing
just as much unemployment did. A reinflation of the nation’s the wrong-headed thinking that
as when we started ... and an money supply counteracted the constitutes much of today’s
enormous debt to boot!”45 high costs of the New Deal, but conventional wisdom about this
brought with it a problem that sordid historical episode is vital
At the end of the decade and plagues us to this day: a dollar to reviving faith in free markets
12 years after the stock market that buys less and less in goods and preserving our liberties.
crash of Black Thursday, 10 and services year after year.
million Americans were jobless. Most importantly, the Truman The nation managed to survive
The unemployment rate was in administration that followed both Hoover’s activism and
excess of 17 percent. Roosevelt Roosevelt was decidedly less eager Roosevelt’s New Deal quackery,
had pledged in 1932 to end to berate and bludgeon private and now the American heritage
the crisis, but it persisted two investors and as a result, those of freedom awaits a rediscovery
presidential terms and countless investors re-entered the economy by a new generation of citizens.
interventions later. and fueled a powerful postwar This time we have nothing to fear
boom. The Great Depression but myths and misconceptions.
finally ended, but it should linger
Whither Free in our minds today as one of the - END -
Enterprise? most colossal and tragic failures
How was it that FDR was elected of government and public policy
four times if his policies were in American history. Postscript:
deepening and prolonging an Have We Learned Our
economic catastrophe? Ignorance Th e g e n e s i s o f th e G re at Lessons?
and a willingness to give the Depression lay in the irresponsible Eighty years after the Great
president the benefit of the doubt monetary and fiscal policies of Depression began, the literature
explain a lot. Roosevelt beat the U.S. government in the late on this painful episode of
Hoover in 1932 with promises of 1920s and early 1930s. These American history is undergoing
Mackinac Center for Public Policy | Great Myths of the Great Depression 17

an encouraging metamorphosis. W h i l e A m e r i c a n s m ay b e The taxpayer bailouts of agencies

The conventional assessment that unlearning some of what they such as Fannie Mae and Freddie
so dominated historical writings thought they knew about the Mac, as well as a growing number
for decades argued that free Great Depression, that’s not of private firms in the early fall of
markets caused the debacle and the same as saying we have 2008, represent more folly with a
that FDR’s New Deal saved the learned the important lessons monumental price tag. Not only
country. Surely, there are plenty well enough to avoid making the will we and future generations be
of poorly-informed partisans, same mistakes again. Indeed, paying those bills for decades, the
ideologues and quacks that still today we are no closer to fixing very process of throwing good
make these superficial claims. the primary cause of the business money after bad will pile moral
Serious historians and economists, cycle — monetary mischief — hazard on top of moral hazard,
however, have been busy chipping than we were 80 years ago. fostering more bad decisions
away at the falsehoods. The essay and future bailouts. This is the
you have just read cites many The financial crisis that gripped stuff that undermines both free
recent works worth careful reading America in 2008 ought to be a enterprise and the soundness
in their entirety. wake-up call. The fingerprints of the currency. Much more
of government meddling are inflation to pay these bills is
At the very moment this latest all over it. From 2001 to 2005, more than a little likely, sooner
edition of “Great Myths of the the Federal Reserve revved up or later.
Great Depression” was about to the money supply, expanding it
go to press, Simon & Schuster at a feverish double-digit rate. “Government,” observed the
published a splendid new volume The dollar plunged in overseas renowned Austrian economist
I strongly recommend. Authored markets and commodity prices Ludwig von Mises, “is the only
by the Foundation for Economic soared. With the banks flush with institution that can take a
Education’s senior historian and liquidity from the Fed, interest valuable commodity like paper,
Hillsdale College professor, Dr. rates plummeted and risky and make it worthless by applying
Burton W. Folsom, the book loans to borrowers of dubious ink.” Mises was describing the
is provocatively titled “New merit ballooned. Politicians curse of inflation, the process
Deal or Raw Deal? — How threw more fuel on the fire whereby government expands
FDR’s Economic Legacy Has by jawboning banks to lend a nation’s money supply and
Damaged America.” It’s one of hundreds of billions of dollars thereby erodes the value of each
the most illuminating works on for subprime mortgages. monetary unit — dollar, peso,
the subject. It will help mightily pound, franc or whatever. It
to correct the record and educate When the bubble burst, some of often shows up in the form of
our fellow citizens about what the very culprits who promoted rising prices, which most people
really happened in the 1930s. the policies that caused it confuse with the inflation itself.
postured as our rescuers while The distinction is an important
Another great addition to the endorsing new interventions, one because, as economist Percy
literature, appearing in 2007, bigger government, more inflation Greaves explained so eloquently,
is “The Forgotten Man: A New of money and credit and massive “Changing the definition changes
History of the Great Depression” taxpayer bailouts of failing firms. the responsibility.”
by Amity Shlaes. The fact that Many of them are also calling for
it has been a New York Times higher taxes and tariffs, the very Define inflation as rising prices
bestseller suggests there is a real nonsense that took a recession in and, like the clueless Jimmy
hunger for the truth about this 1930 and made it a long and deep Carter of the 1970s, you’ll think
period of history. depression. that oil sheiks, credit cards
Mackinac Center for Public Policy | Great Myths of the Great Depression 18

and private businesses are the fostering booms and busts. If it’s doomed Confederate money of
culprits, and price controls are bad enough, it can even wipe out the Civil War.
the answer. Define inflation in the very government responsible
the classic fashion as an increase for it in the first place and then Today ’s slow-motion dollar
in the supply of money and lead to even worse afflictions. depreciation, with consumer
credit, with rising prices as a Hitler and Napoleon both rose prices rising at persistent but
consequence, and you then have to power in part because of the mere single-digit rates, is just
to ask the revealing question, chaos of runaway inflations. a limited version of the same
“ Who increases the money process. Government spends,
supply?” Only one entity can do All this raises many issues runs deficits and pays some of
that legally; all others are called economists have long debated: its bills through the inflation tax.
“counterfeiters” and go to jail. Who or what should determine How long it can go on is a matter
a nation’s supply of money? Why of speculation, but trillions in
Nobel laureate Milton Friedman do governments so regularly national debt and politicians who
argued indisputably that inflation mismanage it? What is the make misers of drunken sailors
is always and everywhere a connection between fiscal and and get elected by promising
monetary matter. Rising prices monetary policy? Suffice it to even more are not factors that
no more cause inflation than wet say here that governments inflate should encourage us.
streets cause rain. because their appetite for revenue
exceeds their willingness to tax Inflation is very much with us but
Before paper money, governments or their ability to borrow. British it must end someday. A currency’s
inflated by diminishing the economist John Maynard Keynes value is not bottomless. Its
precious-metal content of their was an influential charlatan erosion must cease either because
coinage. The ancient prophet in many ways, but he nailed it government stops its reckless
Isaiah reprimanded the Israelites when he wrote, “By a continuing printing or prints until it wrecks
with these words: “Thy silver has process of inflation, governments the money. But surely, which way
become dross, thy wine mixed can confiscate, secretly and it concludes will depend in large
with water.” Roman emperors unobserved, an important part of measure on whether its victims
repeatedly melted down the the wealth of their citizens.” come to understand what it is and
silver denarius and added junk where it comes from. Meanwhile,
metals until the denarius was So, you say, inflation is nasty our economy looks like a roller
less than one percent silver. business but it’s just an isolated coaster because Congresses,
The Saracens of Spain clipped phenomenon with the worst Presidents and the agencies
the edges of their coins so they cases confined to obscure nooks they’ve empowered never cease
could mint more until the coins and crannies like Zimbabwe. their monetary mischief.
became too small to circulate. Not so. The late Frederick Leith-
Prices rose as a mirror image of Ross, a famous authority on Are you tired of politicians
the currency’s worth. international finance, observed: blaming each other, scrambling
“Inflation is like sin; ever y to cover their behinds and score
Rising prices are not the only government denounces it and political points in the midst of
consequence of monetary and every government practices a crisis, and piling debts upon
credit expansion. Inflation also i t .” Ev e n A m e r i c a n s h av e debts they audaciously label
erodes savings and encourages witnessed hyperinflations that “stimulus packages”? Why do
debt. It undermines confidence destroyed two currencies — the so many Americans want to
and de ters inve stment . It ill-fated continental dollar of trust them with their health care,
destabilizes the economy by the Revolutionary War and the education, retirement and a host
Mackinac Center for Public Policy | Great Myths of the Great Depression 19

of other aspects of their lives? It’s of gover nment and how a Everyone has heard the sage
madness writ large. The antidote free economy operates. Help obser vation of philosopher
is the truth. We must learn the distribute copies of this essay George Santayana: “Those who
lessons of our follies and resolve and other good publications cannot remember the past are
to fix them now, not later. that promote liberty and free condemned to repeat it.” It’s a
enterprise. Demand that your warning we should not fail to
To that end, I invite the reader representatives in government heed.
to join the education process. balance the budget, conform
Support organizations like to the spirit and letter of the
FEE and the Mackinac Center Constitution and stop trying
that are working to inform to buy your vote with other
citizens about the proper role people’s money.

About the Author

Lawrence W. Reed is president of the Foundation for Economic Education (FEE), founded in
1946 and headquartered in Irvington, N.Y., and president emeritus of the Mackinac Center
for Public Policy in Midland, Mich. Prior to assuming the FEE presidency in September 2008,
he led the Mackinac Center for 20 years.
Reed is author of more than 1,000 columns and articles that have appeared in publications all around
the world, including The Wall Street Journal, Investor’s Business Daily, The Detroit News, USA
Today, and the Christian Science Monitor. He has visited 70 countries and delivered speeches in many of them, including
his well-known “Seven Principles of Sound Policy” at People’s University in Beijing, China. He is a past president and a
15-year board member of the State Policy Network. He chaired the board of trustees of the Foundation for Economic
Education in the 1990s and has authored nearly 200 articles in FEE’s journal, The Freeman, since 1977.
More information about the author and the two organizations sponsoring this publication can be found at
www.fee.org and www.mackinac.org.
Mackinac Center for Public Policy | Great Myths of the Great Depression 20

Endnotes 1928-1938 (Boston: Houghton Mifflin Page 2, Federal Reserve Building, Library
Company, 1959), p. 70. of Congress, Prints and Photographs
1 Alan Reynolds, “What Do We Know Division, Theodor Horydczak Collection
22 Anderson, p. 315.
About the Great Crash?” National [LC-H814-T-F03-003 DLC].
Review, November 9, 1979, p. 1416. 23 “FDR’s Disputed Legacy,” p. 24.
Page 3, Unemployment, Michigan State
2 Hans F. Sennholz, “The Great 24 Anderson, p. 336. Archives.
Depression,” The Freeman, April 1975, p. 25 Ibid., pp. 332-334. Page 5, Farm Relief Act, Library of
205. 26 “FDR’s Disputed Legacy,” p. 30. Congress, National Photo Company
3 Murray Rothbard, America’s Great 27 John T. Flynn, The Roosevelt Myth Collection, [LC-USZ62-111718 DLC].
Depression (Kansas City: Sheed and (Garden City, N.Y.: Garden City Page 6, Roosevelt, Library of Congress,
Ward, Inc., 1975), p. 89. Publishing Co., Inc., 1949), p. 45. Prints and Photographs Division [LC-
4 Benjamin M. Anderson, Economics and 28 C. David Tompkins, Senator Arthur H. USZ62-117121 DLC].
the Public Welfare: A Financial and Vandenberg: The Evolution of a Modern Page 7, Roosevelt, Franklin D. Roosevelt
Economic History of the United States, Republican, 1884-1945 (East Lansing, Library and Museum.
1914-46, 2nd edition (Indianapolis: MI: Michigan State University Press,
Liberty Press, 1979), p. 127. Page 9, Bridge, Library of Congress,
1970), p. 157. Prints and Photographs Division,
5 Milton Friedman and Anna Jacobson 29 Ibid., p. 121. Historic American Buildings Survey or
Schwartz, A Monetary History of the Historic American Engineering Record,
United States, 1867-1960 (New York: 30 Albert J. Nock, Our Enemy, the State
(online at www.barefootsworld.net/ Reproduction Number [HAER, TEX,42-
National Bureau of Economic Research, VOS.V,4-].
1963; ninth paperback printing by nockoets1.html), Chapter 1, Section IV.
Princeton University Press, 1993), pp. 31 Martin Morse Wooster, “Bring Back the Page 11, Steel Mill, Library of Congress,
411-415. WPA? It Also Had A Seamy Side,” Wall Prints and Photographs Division,
Street Journal, September 3, 1986, p. Theodor Horydczak Collection [LC-
6 Lindley H. Clark, Jr., “After the Fall,” The H814-T-0601 DLC].
Wall Street Journal, October 26, 1979, p. A26.
18. 32 Ibid. Page 12, Supreme Court Building, Library
of Congress, Prints & Photographs
7 “Tearful Memories That Just Won’t 33 Johnson, p. 762.
Division, FSA-OWI Collection, [LC-
Fade Away,” U. S. News & World Report, 34 Sennholz, pp. 212-213. USF34-005615-E DLC].
October 29, 1979, pp. 36-37. 35 William E. Leuchtenburg, Franklin D. Page 13, Strikers, Archives of Labor and
8 “FDR’s Disputed Legacy,” Time, February Roosevelt and the New Deal, 1932-1940 Urban Affairs, Wayne State University.
1, 1982, p. 23. (New York: Harper and Row, 1963), p.
9 Barry W. Poulson, Economic History of 242.
the United States (New York: Macmillan 36 Ibid., pp. 183-184.
Publishing Co., Inc., 1981), p. 508. 37 Robert Higgs, “Regime Uncertainty:
10 Reynolds, p. 1419. Why the Great Depression Lasted So
11 Richard M. Ebeling, “Monetary Central Long and Why Prosperity Resumed
Planning and the State-Part XI: The After the War,” The Independent Review,
Great Depression and the Crisis of Volume I, Number 4: Spring 1997, p.
Government Intervention,” Freedom 573.
Daily (Fairfax, Virginia: The Future of 38 Gary Dean Best, The Critical Press
Freedom Foundation, November 1997), and the New Deal: The Press Versus
p. 15. Presidential Power, 1933-1938
12 Paul Johnson, A History of the American (Westport, Connecticut: Praeger
People (New York: HarperCollins Publishers, 1993), p. 130.
Publishers, 1997), p. 740. 39 Ibid., p. 136.
13 Ibid., p. 741. 40 Burton Folsom, “What’s Wrong
14 Larry Schweikart and Michael Allen, With The Progressive Income Tax?”,
A Patriot’s History of the United States: Viewpoint on Public Issues, No. 99-18,
From Columbus’s Great Discovery to May 3, 1999, Mackinac Center for Public
the War on Terror (New York: Sentinel, Policy, Midland, Michigan.
2004), p. 553. 41 Ibid.
15 Ibid., p. 554. 42 Higgs, p. 564.
16 “FDR’s Disputed Legacy,” p. 24. 43 Quoted in Herman E. Krooss, Executive
17 Sennholz, p. 210. Opinion: What Business Leaders Said
18 From The Liberal Tradition: A Free and Thought on Economic Issues,
People and a Free Economy by Lewis 1920s-1960s (Garden City, N.Y.:
W. Douglas, as quoted in “Monetary Doubleday and Co., 1970), p. 200.
Central Planning and the State, Part 44 Higgs, p. 577.
XIV: The New Deal and Its Critics,” by 45 Blum, pp. 24-25.
Richard M. Ebeling in Freedom Daily,
February 1998, p. 12.
19 Friedman and Schwartz, p. 330. Photo Credits
20 Jim Powell, FDR’s Folly: How Roosevelt Cover, Artwork based on a poster created
and His New Deal Prolonged the Great by Works Progress Administration
Depression (New York: Crown Forum, between 1941 and 1943.
2003), p. 32. Page 1, Library of Congress, Prints and
21 John Morton Blum, From the Photographs Division, [LC-USF34-T01-
Morgenthau Diaries: Years of Crisis, 018258-C DLC].
 Mackinac Center for Public Policy | Great Myths of the Great Depression 21

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