The Final Phase of the Great Depression

(The following is an edited excerpt of Mackinac Center President Lawrence W. Reed’s essay "Great Myths of the Great Depression," which was updated and reissued by the Center last fall. The excerpt, which discusses the Depression’s final years, was first featured in the Winter/Spring 2006 issue of Impact, the Mackinac Center’s quarterly newsletter.)

The stage was set for the 1937-38 collapse — the fourth and final phase of the Great Depression — with the passage in 1935 of the National Labor Relations Act, better known as the "Wagner Act." To quote professor Hans Sennholz:

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"This law revolutionized American labor relations. It took labor disputes out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board further perverted this law, which already afforded legal immunities and privileges to labor unions. The U.S. thereby abandoned a great achievement of Western civilization, equality under the law."

Armed with sweeping new powers, labor unions went on a militant organizing frenzy. Threats, boycotts, strikes, seizures of plants and widespread violence pushed productivity down sharply and unemployment up dramatically. Historian William E. Leuchtenburg, no friend of free enterprise, observed, "Property-minded citizens were scared by the seizure of factories, incensed when strikers interfered with the mails, vexed by the intimidation of nonunionists, and alarmed by flying squadrons of workers who marched, or threatened to march, from city to city."

An Unfriendly Climate for Business

From the White House on the heels of the Wagner Act came a thunderous barrage of insults against business. Businessmen, President Roosevelt fumed, were obstacles on the road to recovery. He blasted them as "economic royalists" and said that businessmen as a class were "stupid." He followed up the insults with a rash of new punitive measures. New strictures on the stock market were imposed. A tax on corporate retained earnings, called the "undistributed profits tax," was levied. The top (marginal income tax) rate was raised at first to 79 percent and then later to 90 percent. Economic historian Burton Folsom notes that in 1941 Roosevelt even proposed a whopping 99.5 percent marginal rate on all incomes over $100,000. "Why not?" he said when an advisor questioned the idea.

After that confiscatory proposal failed, Roosevelt issued an executive order to tax all income over $25,000 at the astonishing rate of 100 percent. He also promoted the lowering of the personal exemption to only $600, a tactic that pushed most American families into paying at least some income tax for the first time. Shortly thereafter, Congress rescinded the executive order, but went along with the reduction of the personal exemption.

Economist Robert Higgs notes that when a nationally representative poll in the spring of 1939 asked, "Do you think the attitude of the Roosevelt administration toward business is delaying business recovery?" the American people responded "yes" by a ratio of more than 2-to-1. The business community felt even more strongly so.

Meanwhile, the Federal Reserve again seesawed its monetary policy in the mid-‘30s, first up, then down, then up sharply through America’s entry into World War II. Contributing to the economic slide of 1937, the Fed doubled reserve requirements on the nation’s banks. Experience has shown that a roller-coaster monetary policy is enough by itself to produce a roller-coaster economy.

In his private diary, Henry Morgenthau, Roosevelt’s Treasury Secretary, wrote: "We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot!"

At the end of the decade and 12 years after the stock market crash of Black Thursday, 10 million Americans were jobless. The unemployment rate was in excess of 17 percent.

Whither Free Enterprise?

Along with the holocaust of World War II came a revival of trade with America’s allies. The war’s destruction of people and resources did not help the U.S. economy, but this renewed trade did. A reinflation of the nation’s money supply counteracted the high costs of the New Deal, but brought with it a problem that plagues us to this day: a dollar that buys less and less in goods and services year after year. Most importantly, the Truman administration that followed Roosevelt was decidedly less eager to berate and bludgeon private investors, and as a result, those investors re-entered the economy and fueled a powerful postwar boom.

The Great Depression should linger in our minds today as one of the most colossal and tragic failures of government and public policy in American history. The nation managed to survive, but now the American heritage of freedom awaits a rediscovery by a new generation of citizens. This time we have nothing to fear but myths and misconceptions.


Lawrence W. Reed is president of the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.