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Reed 17 Printable Format Lawerence Reed is president of the Mackinac Center for Public Policy, a free-market research and educational organization in Midland, Michigan, and chairman of FEE's Board of Trustees. His monthly column in The Freeman, "Ideas and Consequences," will resume with next month's issue. This essay is condensed from a longer monograph of the same title, available for $5 postpaid from FEE. Many volumes have been written about the Great Depression and its impact on the lives of millions of Americans. Historians, economists, and politicians have all combed the wreckage searching for the black box that will reveal the cause of this legendary tragedy. Sadly, all too many of them decide to abandon their search, finding it easier perhaps to circulate a host of false and harmful conclusions about the events of seven decades ago. Over the four years from 1929 to 1933, production at the nations factories, mines, and utilities fell by more than half. Stock prices collapsed to one-tenth of their pre-crash height. One of every four workers was out of a job at the Depressions nadir, and ugly rumors of revolt simmered for the first time since the Civil War. Students today are frequently taught that unfettered free enterprise collapsed of its own weight in 1929, paving the way for a decade-long economic depression full of hardship and misery. President Herbert Hoover is presented as an advocate of hands-off, or laissez-faire, economic policy, while his successor, Franklin Roosevelt, is the economic savior whose policies brought us recovery. This popular account of the Depression belongs in a book of fairy tales and not in a serious discussion of economic history, as a review of the facts demonstrates. The Great, Great, Great, Great Depression To properly understand the events of the time, it is appropriate to view the Great Depression as not one, but four consecutive depressions rolled into one. Professor Hans Sennholz has labeled these four phases as follows: the business cycle; Phase I: The Business Cycle The Great Depression was not the countrys first depression, though it proved to be the longest. The common thread woven through the several earlier debacles was disastrous manipulation of the money supply by government. For various reasons, government policies were adopted that ballooned the quantity of money and credit. A boom resulted, followed later by a painful day of reckoning. None of Americas depressions prior to 1929, however, lasted more than four years and most of them were over in two. The Great Depression lasted for a dozen years because the government compounded its monetary errors with a series of harmful interventions. Most monetary economists, particularly those of the Austrian school, have observed the close relationship between money supply and economic activity. When government inflates the money and credit supply, interest rates at first fall. Businesses invest this easy money in new production projects and a boom takes place in capital goods. As the boom matures, business costs rise, interest rates readjust upward, and profits are squeezed. The easy-money effects thus wear off and the monetary authorities, fearing price inflation, slow the growth of or even contract the money supply. In either case, the manipulation is enough to knock out the shaky supports from underneath the economic house of cards. One of the most thorough and meticulously documented accounts of the Feds inflationary actions prior to 1929 is Americas Great Depression by the late Murray Rothbard. By early 1929, the Federal Reserve was taking the punch away from the party. It choked off the money supply, raised interest rates, and for the next three years presided over a money supply that shrank by 30 percent. This deflation following the inflation wrenched the economy from tremendous boom to colossal bust. The smart moneythe Bernard Baruchs and the Joseph Kennedys who watched things like money supplysaw that the party was coming to an end before most other Americans did. Baruch actually began selling stocks and buying bonds and gold as early as 1928; The stock market, after nearly two months of moderate decline, plunged on Black ThursdayOctober 24, 1929as the pessimistic view of large and knowledgeable investors spread. The stock market crash was only a symptomnot the causeof the Great Depression: the market rose and fell in near synchronization with what the Fed was doing. Phase II: Disintegration of the World Economy If this crash had been like previous ones, the subsequent hard times might have ended in a year or two. But unprecedented political bungling instead prolonged the misery for twelve long years. It shot up rapidly until peaking out at more than 25 percent in 1933. Until March 1933, these were the years of President Herbert Hooverthe man that anti-capitalists depict as a champion of noninterventionist, laissez-faire economics. Did Hoover really subscribe to a hands off the economy, free-market philosophy? His opponent in the 1932 election, Franklin Roosevelt, didnt think so. During the campaign, Roosevelt blasted Hoover for spending and taxing too much, boosting the national debt, choking off trade, and putting millions of people on the dole. He accused the president of reckless and extravagant spending, of thinking that we ought to center control of everything in Washington as rapidly as possible, and of presiding over the greatest spending administration in peacetime in all of history. The crowning folly of the Hoover administration was the Smoot-Hawley Tariff, passed in June 1930. It came on top of the Fordney-McCumber Tariff of 1922, which had already put American agriculture in a tailspin during the preceding decade. They ignored an important principle of international commerce: trade is ultimately a two-way street; Foreign companies and their workers were flattened by Smoot-Hawleys steep tariff rates, and foreign governments soon retaliated with trade barriers of their own. With their ability to sell in the American market severely hampered, they curtailed their purchases of American goods. With a stroke of the presidential pen, farmers in this country lost nearly a third of their markets. Farm prices plummeted and tens of thousands of farmers went bankrupt. With the collapse of agriculture, rural banks failed in record numbers, dragging down hundreds of thousands of their customers. Hoover dramatically increased government spending for subsidy and relief schemes. In the space of one year alone, from 1930 to 1931, the federal governments share of GNP increased by about one-third. Hoovers agricultural bureaucracy doled out hundreds of millions of dollars to wheat and cotton farmers even as the new tariffs wiped out their markets. His Reconstruction Finance Corporation ladled out billions more in business subsidies. Can any serious scholar observe the Hoover administrations massive economic intervention and, with a straight face, pronounce the inevitably deleterious effects as the fault of free markets? Phase III: The New Deal Franklin Delano Roosevelt won the 1932 presidential election in a landslide, collecting 472 electoral votes to just 59 for the incumbent Herbert Hoover. The platform of the Democratic Party whose ticket Roosevelt headed declared, We believe that a party platform is a covenant with the people to be faithfully kept by the party entrusted with power. It called for a 25 percent reduction in federal spending, a balanced federal budget, a sound gold currency to be preserved at all hazards, the removal of government from areas that belonged more appropriately to private enterprise, and an end to the extravagance of Hoovers farm programs. This is what candidate Roosevelt promised, but it bears no resemblance to what President Roosevelt actually delivered. In the first year of the New Deal, Roosevelt proposed spending $10 billion while revenues were only $3 billion. Between 1933 and 1936, government expenditures rose by more than 83 percent. Roosevelt secured passage of the Agricultural Adjustment Act (AAA), which levied a new tax on agricultural processors and used the revenue to supervise the wholesale dest...
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