News Story

Great Myths About the Great Depression Still Abound

Many historians say president Franklin D. Roosevelt made the Great Depression worse.

“FDR fixed the economy with make-work jobs,” a recent headline stated.

Jennie Phipps, an contributor, wrote in her Aug. 15 story: “When I was growing up, my mother thought Franklin Delano Roosevelt sat at the right hand of God, mostly because he found a way out of the Great Depression by putting people to work through such government programs as the Civilian Conservation Corp. and the Works Projects Administration.” (Editor's Note: The actual names of the programs were the Civilian Conservation Corps and the Works Progress Administration.)

But some economic historians believe Phipps has bought into one of the biggest myths of American politics – that FDR’s New Deal actually worked.

Franklin D. Roosevelt started his 12-year run as president in 1933, four years after the stock market crash of 1929. Historians agree the New Deal and the Second New Deal were a series of government-backed economic programs that were launched from 1933 through 1936.

From 1932 through 1939, the country’s unemployment rate ranged from 23.6 percent (1932) to 20.7 percent (mid-1939).

“The New Deal was a gigantic failure in revitalizing the U.S. economy,” said Burt Folsom, a professor of history at Hillsdale College and senior fellow in economic education with the Mackinac Center.

Lawrence Reed, president emeritus of the Mackinac Center for Public Policy, chronicled the harmful impacts of FDR’s New Deal in “Great Myths of the Great Depression.”

The Great Depression was four consecutive downturns rolled into one, according to Reed, who says that the country had had several other depressions, but none lasted more than four years and most were over in two years.

“The calamity that began in 1929 lasted at least three times longer than any of the country’s previous depressions because the government compounded its initial errors with a series of additional and harmful interventions,” Reed wrote.

Reed examined the damage on the American economy via government policies by looking at the Smoot-Hawley Tariff, passed in June 1930 under the Herbert Hoover administration. The stock market dropped 20 points on the day Hoover signed Smoot-Hawley into law and continued dropping the next two years, Reed wrote.

“The most protectionist legislation in U.S. history, Smoot-Hawley virtually closed the borders to foreign goods and ignited a vicious international trade war,” Reed wrote.

There were 887 tariffs that were sharply increased and significantly raised the rates on agricultural products and other consumables. Officials in the administration and Congress thought raising trade barriers would make Americans buy more American products and help employ more people, Reed wrote.

But foreign governments soon put up their own trade barriers and pulled back on buying U.S. goods. American agriculture suffered as farm prices plummeted and tens of thousands of farmers went bankrupt, Reed wrote.

A bushel of wheat that sold for $1 in 1929 was selling for 30 cents just three years later.

Reed wrote that with the collapse of agriculture, rural banks closed. Some 9,000 banks closed between 1930 and 1933.

And Phipps appears to have forgotten about President Barack Obama’s attempt to create jobs through government money.

The American Recovery and Reinvestment Act was signed into law in February 2009 when the nation’s unemployment rate was 8.2 percent. Over the next 29 months, the nation’s unemployment rate has ranged between 8.6 percent and 10.1 percent. In July of 2011, it was 9.1 percent.

Tad DeHaven, a federal budget analyst for the Cato Institute, said the Congressional Budget Office has the ARRA costing $821 billion.

“Spending accounts for about 65 percent and tax cuts 35 percent," DeHaven said. "Among the tax provisions of the bill were a $400 per person 'Making Work Pay' tax credit, a patch of the Alternative Minimum Tax, numerous temporary breaks for businesses, an expansion of several tax credits, and a number of provisions to reduce taxation on public bonds. These weren’t 'pro-growth' tax cuts that effect long-term decision making. These were short-term Keynesian styled tax cuts."

"As for make work programs, there’s no free lunch," DeHaven continued. "Every dollar the federal government spends paying somebody to do something is one less dollar for the private sector. The fundamental question therefore is: Which do we want allocating economic resources, politicians and bureaucrats or the marketplace? Those who would answer affirmative to the former ought to read up on the defunct Soviet Union.”


See also:

Great Myths of the Great Depression

How Federal Money Doesn't Translate Into Jobs