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It is becoming
increasingly common for commentators to allude to the Great
Depression when writing about the current economic crisis in the
United States and around the world. For all of our sakes, I
sincerely hope that the allusion is hyperbolic, but there is a
sense in which it could not be more apt: Then, as now, the
failures of intrusive government policies were blamed on
allegedly free, unregulated markets; and then, as now, those
government failures were used to argue for ever more intrusive
policies. While it is true that some deregulation has taken
place in recent decades, critics of capitalism exaggerate these
salutary changes. In truth, the market today is in many ways
more heavily regulated than ever before.
It remains imperative for
current defenders of liberty to challenge the all too common
misconception that unfettered, free-market capitalism caused the
Great Depression. The first step in debunking this myth is to
shine a light on the role of the Federal Reserve in inflating
the money supply in the 1920's, fuelling the creation of the
bubble that finally burst when the stock market collapsed in
1929. It was (and still is) argued that government control of
the money supply is a way to ease the severity of business
cycles, but the Federal Reserve did just the opposite in the
1920s, exacerbating first the boom and then the bust. No
depression in the entire history of capitalism prior to the
Fed's creation in 1913 had been anywhere near as severe,
prolonged, and widespread as the Great Depression.
Another step in
eradicating this myth is to re-examine the role of Herbert
Hoover, President of the United States from 1929 to 1933. The
common misconception has it that Hoover's hands-off,
laissez-faire response made the Depression worse than it had
to be. There is no question Hoover did make the Depression worse,
but was it really by keeping his hands off of the economy? As
Lawrence W. Reed writes in "Great
Myths of the Great Depression," FDR sure didn't think so: "During
the [1932] campaign, Roosevelt blasted Hoover for spending and
taxing too much, boosting the national debt, choking off trade,
and putting millions on the dole."
And Roosevelt was right.
The Hoover administration's Smoot Hawley Tariff Act of
1930, which Reed calls "the most
protectionist legislation in U.S. history," sharply raised
tariffs on just about everything, leading foreign governments to
retaliate with tariffs of their own. With governments around the
world clamouring to shoot themselves in the foot, imports and
exports plummeted, making everyone worse off. According to Reed,
"The shrinkage in world trade brought on by the tariff wars
helped set the stage for World War II a few years later."
Hoover also pressured
business leaders into keeping wages high despite falling profits
and prices, which predictably resulted in high unemployment; he
dramatically boosted federal government spending; and he
doubled the federal income tax. With friends like these, the
free market doesn't need any enemies.
But it got one anyway, in
the person of Franklin Delano Roosevelt, who succeeded Hoover as
President in 1933. After having campaigned against Hoover's big-spending,
big-taxing, protectionist ways, FDR did a complete about-face.
His New Deal policies represented not a change in
direction, as is commonly believed, but a continuation and an
extension of Hoover's failed strategy. After promising to reduce
federal government spending by 25 percent, FDR oversaw an 83
percent increase from 1933 to 1936. Comprehensive minimum wage
laws pleased some workers, but at the cost of making
unemployment worse. Meanwhile, the government raised taxes on
agriculture and then "used the revenue to supervise the
wholesale destruction of valuable crops and cattle," hurting
millions of consumers in the name of raising prices to help
farmers. Under FDR, top income tax rates hit 90 percent and
business was hogtied six ways till Sunday.
Predictably, the
Depression dragged on. In fact, it is hard to imagine how FDR,
Hoover, and the Fed could have screwed up the economy any worse
than they did. As Reed writes, "Those who can survey the events
of the 1920s and 1930s and blame free-market capitalism for the
economic calamity have their eyes, ears, and minds firmly closed
to the facts." Defenders of liberty must teach others the facts
many have never learned. The Great Depression was not caused by
the free market; it was caused by "political bungling on a grand
scale." The sad part is that if not enough of us learn our
lesson properly, we will surely all be held back and made to
repeat it.
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