Herbert Hoover and the New Deal

Politicians and pundits portray Herbert Hoover as a defender of laissez faire governance whose dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the stock market crash in 1929. In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation—all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt's advisers knew that Hoover had started the New Deal. One of them wrote, "When we all burst into Washington ... we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself."

Hoover's big-spending, interventionist policies prolonged the Great Depression, and similar policies today could do similar damage. Dismantling the mythical presentation of Hoover as a "do-nothing" president is crucial if we wish to have a proper understanding of what did and did not work in the Great Depression so that we do not repeat Hoover's mistakes today.

from: Herbert Hoover and the New Deal (pdf)

Thomas Sowell on The Great Depression and Economic Recovery

Sowell writes:

Guess who said the following: "We have tried spending money. We are spending more than we have ever spent before and it does not work." ...

It was Henry Morgenthau, Secretary of the Treasury under President Franklin D. Roosevelt and one of FDR's closest advisers.

He added, "after eight years of this Administration we have just as much unemployment as when we started. . . And an enormous debt to boot!"...

Far from pulling the country out of the Great Depression by following Keynesian policies, FDR created policies that prolonged the depression until it was more than twice as long as any other depression in American history. Moreover, Roosevelt's ad hoc improvisations followed nothing as coherent as Keynesian economics...

It is not a pretty story. But we need to understand it if we want to avoid the ugly consequences of very similar policies today.

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Did FDR End the Depression?

Burt Folsom says no:

'He got us out of the Great Depression." That's probably the most frequent comment made about President Franklin Roosevelt, who died 65 years ago today. Every Democratic president from Truman to Obama has believed it, and each has used FDR's New Deal as a model for expanding the government.

It's a myth. FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II.

Let's start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good.

What about World War II? We need to understand that the near-full employment during the conflict was temporary. Ten million to 12 million soldiers overseas and another 10 million to 15 million people making tanks, bullets and war materiel do not a lasting recovery make. The country essentially traded temporary jobs for a skyrocketing national debt. Many of those jobs had little or no value after the war.

No one knew this more than FDR himself. His key advisers were frantic at the possibility of the Great Depression's return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the "right to a useful and remunerative job" provided by the federal government if necessary...

Congress—both chambers with Democratic majorities—responded by just saying "no." No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits.

Instead, Congress reduced taxes. Income tax rates were cut across the board. FDR's top marginal rate, 94% on all income over $200,000, was cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a change in the amount of income exempt from taxation an estimated 12 million Americans were eliminated from the tax rolls entirely...

Congress substituted the tonic of freedom for FDR's New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

The Great Depression was over, no thanks to FDR. Yet the myth of his New Deal lives on. With the current effort by President Obama to emulate some of FDR's programs to get us out of the recent deep recession, this myth should be laid to rest.

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Great Depression Unemployment

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How to Avoid Great Depression II

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire – to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch... The proper injunction to government in a depression is cut the budget and leave the economy strictly alone.
Murray Rothbard

A Program of True Economic Reform

1) End the Fed.

2) Restore sound money to the economy.

3) Lower taxes and cut government spending.

4) No bailouts.

5) Allow prices and wages to fall to levels set by the market.

6) Regulate the government, not private property and markets.

read the entire essay

My thoughts: This is an outstanding essay that provides many fact and figures debunking the idea that massive government intervention can solve economic problems.

Bibliography on the Great Depression

In the present recession, advocates of government intervention often evoke the specter of the Great Depression. Unless the government intervenes massively, we are told, we risk an economic collapse comparable to that of the 1930s. To see the fallacy of this claim, it is imperative to understand that government intervention both led to the depression and prevented recovery from it. The following books, I hope, will assist those interested in grasping what happened in this vital historical era.

link to the full list

My thoughts: A much needed list to inform and educate people about the most significant economic event of the 20th century.

Also of interest: Gordon's Books on Liberty Bibliography

The Bailout Reader

The New Deal Prolonged the Depression

The New Deal is widely perceived to have ended the Great Depression, and this has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that FDR's policies shortened the Depression, or that similar policies will pull our nation out of its current economic downturn.

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32...

The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression...

The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.

President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive.
Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.

read the WSJ article

The New Deal Analysis

The premises of the New Deal control the ground and direction of American social, economic, and political life. These premises are now identifiable, although only with the passage of time:

1. Centralization. The view that all of the economic activity within U.S. borders, that is, the abstraction that many of us call the economy, is actually a real and single entity; that this whole can be and should be subject to the planning and control of centralized national officials.

2. Collectivization. The view that the life of each person is largely determined by the collective of other persons (and by collective forces beyond his control that induce insecurities); and that the powers of the collective others should be controlled by nationally elected officials so as to enhance the life, progress, happiness, and welfare of each person; that the same officials should create arrangements to reduce the various insecurities of life.

3. Market failure. The view that people in markets, left to themselves, are incapable of sustaining their own investment and employment; leading to the view that government officials need to be the watchdogs, regulators, and controllers over people making exchanges in markets.

4. Insufficiency of social institutions. The view that persons cannot count on other persons, families, churches, clubs, insurers, companies, associations etc. to meet their own needs; leading to the view that national officials acting with the powers of government are essential for meeting people’s needs.

5. Symbiosis of big institutions and big government. The view that government controls the economy by supporting and controlling big business, big labor, big agriculture, big media, big defense companies, big banks, and so on; the view that individuals, small business, independent proprietors, and small institutions of all kinds, are minor.

6. The President as personification of Democracy. The view that national institutions speak for all the people (as opposed to federalism); the view that presidential leadership supercedes national-state government relations; the view of Democracy as a collective government personified by the President, as opposed to democracy viewed as self-government.

7. Inflation is good for the economy. The view that persons should not control what money is, but that government officials should; the view that a growing economy requires depreciation of the currency and that a declining level of prices of goods and services is to be avoided.

8. Rejection of limited government. The view that the powers of the national government are virtually unlimited, or limited only by expediency; that the national government controls the persons and wealth of all of its citizens.

America will not experience a revival or redirection toward liberty and free markets until Americans reject – fully, firmly, and consciously – the premises of the New Deal, for it was the New Deal that codified and institutionalized the American rejection of liberty and its exchange for collectivism and fascism.

read the article

But It Will Work This Time

“We have tried spending money. We are spending more than we have ever spent before, and it does not work... I say after eight years of this administration, we have just as much unemployment as when we started -- and an enormous debt to boot.”
- Henry Morgenthau (FDR's Treasury Secretary)

My thoughts: Economic ignorance allows us to fall easy prey to political charlatans and demagogues. Walter Williams

Unemployment During the New Deal

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Did the New Deal Work?

In 1995, economic historian Robert Whaples published a survey in the Journal of Economic History asking “Where Is There Consensus Among American Economic Historians?” (Vol. 55, March 1995). Half of the economists and a third of historians agreed, in whole or in part, that the New Deal prolonged the Great Depression.

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"One would be very hard-pressed to find a serious professional historian who believes that the New Deal prolonged the Depression."
Newsweek's Daniel Gross

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A Re-Assessment of the New Deal

The traditional story is that President Franklin D. Roosevelt rescued capitalism by resorting to extensive government intervention; the truth is that Roosevelt changed course from year to year, trying a mix of policies, some good and some bad. It’s worth sorting through this grab bag now, to evaluate whether any of these policies might be helpful...

MONETARY POLICY IS KEY As Milton Friedman and Anna Jacobson Schwartz argued in a classic book, “A Monetary History of the United States,” the single biggest cause of the Great Depression was that the Federal Reserve let the money supply fall by one-third, causing deflation. Furthermore, banks were allowed to fail, causing a credit crisis...

It’s not just monetary and fiscal policies that are important. Roosevelt instituted a disastrous legacy of agricultural subsidies and sought to cartelize industry, backed by force of law. Neither policy helped the economy recover.

He also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period...

DON’T RAISE TAXES IN A SLUMP The New Deal’s legacy of public worksprograms has given many people the impression that it was a time of expansionary fiscal policy, but that isn’t quite right. Government spending went up considerably, but taxes rose, too. Under President Herbert Hoover and continuing with Roosevelt, the federal government increased income taxes, excise taxes, inheritance taxes, corporate income taxes, holding company taxes and “excess profits” taxes.

In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression. Our current downturn will end as well someday, and, as in the ’30s, the recovery will probably come for reasons that have little to do with most policy initiatives.

read the New York Times article

Recommended Reading: Hoover's Attack on Laissez Faire

Hoover's Attack on Laissez-Faire
Murray Rothbard (from Chapter 7 of America's Great Depression)

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire — to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch.

Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses...

Hence, the proper injunction to government in a depression is cut the budget and leave the economy strictly alone. Currently fashionable economic thought considers such a dictum hopelessly outdated; instead, it has more substantial backing now in economic law than it did during the 19th century...

Laissez-faire, then, was the policy dictated both by sound theory and by historical precedent. But in 1929, the sound course was rudely brushed aside. Led by President Hoover, the government embarked on what Anderson has accurately called the "Hoover New Deal." For if we define "New Deal" as an antidepression program marked by extensive governmental economic planning and intervention — including bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending (e.g., subsidies to unemployment and public works) — Herbert Clark Hoover must be considered the founder of the New Deal in America. Hoover, from the very start of the depression, set his course unerringly toward the violation of all the laissez-faire canons. As a consequence, he left office with the economy at the depths of an unprecedented depression, with no recovery in sight after three and a half years, and with unemployment at the terrible and unprecedented rate of 25 percent of the labor force...

read the entire essay

My Comments: Economic freedom and laissez-faire are vastly superior to central planning, government intervention, and various middle-of-the-road policies that carry us further down the road to serfdom.

Book Review: The Forgotten Man

A Review of The Forgotten Man: A New History of the Great Depression by Amity Shlaes
reviewed by George Leef

“The Depression hit the country because capitalism has a tendency to sometimes collapse, but luckily Roosevelt was elected and his brilliant New Deal policies got the economy moving again.”

That view is not just mistaken – it’s a key component of the statist mythology in America…

With her new book, The Forgotten Man, Amity Shlaes has dealt a shattering blow to that mythology. Her lucid and highly readable book leaves the reader with the understanding that capitalism got a bum rap in the 1930s and that the New Deal, far from being brilliant, was a nightmare…

Three years of interventionist policies under Hoover – Shlaes makes it clear that Hoover was anything but the dogmatic laissez-faire advocate he is usually said to have been – and five more under Roosevelt had turned America into a country where a nearly omnipotent government was everywhere, controlled by people who admired Stalin and Mussolini as models of forward-looking leaders…

As an aside, one can’t help wondering what the United States would be like today if, instead of turning to coercive, statist “remedies” for the Depression, Americans had drawn the correct conclusions and turned away from the bad policies they already had, especially high tariffs and central banking. America would be a much freer and more prosperous country today but for the intellectual blunders of the 1930s…

Roosevelt and his subordinates tinkered and tampered constantly with the liberty and property of Americans. The federal budget grew and grew and regulations on business mushroomed, but the economy remained in the doldrums. It never dawned on the New Dealers that coercion is counterproductive…

read the full review

A must read for those who think FDR "saved capitalism" and ended the Great Depression.