FDR Worsened The Great Depression.....

John A. Quayle blueoval at SGI.NET
Sun Dec 2 00:45:25 MST 2001


The Free Market

February 1995
Volume 13, Number 2

How FDR Made the Depression Worse
Robert Higgs

Franklin Roosevelt "did bring us out of the Depression," Newt Gingrich told
a group of Republicans after the recent election, and that makes FDR "the
greatest figure of the 20th century." As political rhetoric, the statement
is likely to come from someone who does not support a market economy. The
New Deal, after all, was the largest peacetime expansion of federal
government power in this century. Moreover, Gingrich's view that FDR saved
us from the Depression is indefensible; Roosevelt's policies prolonged and
deepened it.

There's no doubt that Roosevelt changed the character of the American
government--for the worse. Many of the reforms of the 1930s remain embedded
in policy today: acreage allotments, price supports and marketing controls
in agriculture, extensive regulation of private securities, federal
intrusion into union-management relations, government lending and insurance
activities, the minimum wage, national unemployment insurance, Social
Security and welfare payments, production and sale of electrical power by
the federal government, fiat money--the list goes on.

Roosevelt's revolution began with his inaugural address, which left no
doubt about his intentions to seize the moment and harness it to his
purposes. Best remembered for its patently false line that "the only thing
we have to fear is fear itself," it also called for extraordinary emergency
governmental powers.

The day after FDR took the oath of office, he issued a proclamation calling
Congress into a special session. Before it met, he proclaimed a national
banking holiday--an action he had refused to endorse when Hoover suggested
it three days earlier.

Invoking the Trading with the Enemy Act of 1917, Roosevelt declared that
"all banking transactions shall be suspended." Banks were permitted to
reopen only after case-by-case inspection and approval by the government, a
procedure that dragged on for months. This action heightened the public's
sense of crisis and allowed him to ignore traditional restraints on the
power of the central government.

In their understanding of the Depression, Roosevelt and his economic
advisers had cause and effect reversed. They did not recognize that prices
had fallen because of the Depression. They believed that the Depression
prevailed because prices had fallen. The obvious remedy, then, was to raise
prices, which they decided to do by creating artificial shortages. Hence
arose a collection of crackpot policies designed to cure the Depression by
cutting back on production. The scheme was so patently self-defeating that
it's hard to believe anyone seriously believed it would work.

The goofiest application of the theory had to do with the price of gold.
Starting with the bank holiday and proceeding through a massive gold-buying
program, Roosevelt abandoned the gold standard, the bedrock restraint on
inflation and government growth. He nationalized the monetary gold stock,
forbade the private ownership of gold (except for jewelry, scientific or
industrial uses, and foreign payments), and nullified all contractual
promises--whether public or private, past or future--to pay in gold.

Besides being theft, gold confiscation didn't work. The price of gold was
increased from $20.67 to $35.00 per ounce, a 69% increase, but the domestic
price level increased only 7% between 1933 and 1934, and over rest of the
decade it hardly increased at all. FDR's devaluation provoked retaliation
by other countries, further strangling international trade and throwing the
world's economies further into depression.

Having hobbled the banking system and destroyed the gold standard, he
turned next to agriculture. Working with the politically influential Farm
Bureau and the Bernard Baruch gang, Roosevelt pushed through the
Agricultural Adjustment Act of 1933. It provided for acreage and production
controls, restrictive marketing agreements, and regulatory licensing of
processors and dealers "to eliminate unfair practices and charges." It
authorized new lending, taxed processors of agricultural commodities, and
rewarded farmers who cut back production.

The objective was to raise farm commodity prices until they reached a much
higher "parity" level. The millions who could hardly feed and clothe their
families can be forgiven for questioning the nobility of a program designed
to make food and fiber more expensive. Though this was called an
"emergency" measure, no President since has seen fit to declare the
emergency over.

Industry was virtually nationalized under Roosevelt's National Industrial
Recovery Act of 1933. Like most New Deal legislation, this resulted from a
compromise of special interests: businessmen seeking higher prices and
barriers to competition, labor unionists seeking governmental sponsorship
and protection, social workers wanting to control working conditions and
forbid child labor, and the proponents of massive spending on public works.

The legislation allowed the President to license businesses or control
imports to achieve the vaguely identified objectives of the act. Every
industry had to have a code of fair competition. The codes contained
provisions setting minimum wages, maximum hours, and "decent" working
conditions. The policy rested on the dubious notion that what the country
needed most was cartelized business, higher prices, less work, and steep
labor costs.

To administer the act, Roosevelt established the National Recovery
Administration and named General Hugh Johnson, a crony of Baruch's and a
former draft administrator, as head. Johnson adopted the famous Blue Eagle
emblem and forced businesses to display it and abide by NRA codes. There
were parades, billboards, posters, buttons, and radio ads, all designed to
silence those who questioned the policy. Not since the First World War had
there been anything like the outpouring of hoopla and coercion. Cutting
prices became "chiseling" and the equivalent of treason. The policy was
enforced by a vast system of agents and informers.

Eventually the NRA approved 557 basic and 189 supplementary codes, covering
about 95% of all industrial employees. Big businessmen dominated the
writing and implementing of the documents. They generally aimed to suppress
competition. Figuring prominently in this effort were minimum prices, open
price schedules, standardization of products and services, and advance
notice of intent to change prices. Having gained the government's
commitment to stilling competition, the tycoons looked forward to
profitable repose.

But the initial enthusiasm evaporated when the NRA did not deliver, and for
obvious reasons. Even its corporate boosters began to object to the
regimentation it required. By the time the Supreme Court invalidated the
whole undertaking in early 1935, most of its former supporters had lost
their taste for it.

Striking down the NRA, Chief Justice Charles Evans Hughes wrote that
"extraordinary conditions do not create or enlarge constitutional power."
Congress "cannot delegate legislative power to the President to exercise an
unfettered discretion to make whatever laws he thinks may be needed."

Despite the decision, the NRA-approach did not disappear completely. Its
economic logic reappeared in the National Labor Relations Act of 1935,
reinstating union privileges, and the Fair Labor Standards Act of 1938,
stipulating regulations for wages and working hours. The Bituminous Coal
Act of 1937 reinstated an NRA-type code for the coal industry, including
price-fixing. The Works Progress Administration made the government the
employer of last resort. Using the Connally Act of 1935, Roosevelt
cartelized the oil industry. Eventually, of course, the Supreme Court came
around to Roosevelt's way of thinking.

Yet after all this, the grand promise of an end to the suffering was never
fulfilled. As the state sector drained the private sector, controlling it
in alarming detail, the economy continued to wallow in depression. The
combined impact of Herbert Hoover's and Roosevelt's interventions meant
that the market was never allowed to correct itself. Far from having gotten
us out of the Depression, FDR prolonged and deepened it, and brought
unnecessary suffering to millions.

Even more tragic is the lasting legacy of Roosevelt. The commitment of both
masses and elites to individualism, free markets, and limited government
suffered a blow in the 1930s from which it has yet to recover fully. The
theory of the mixed economy is still the dominant ideology backing
government policy. In place of old beliefs about liberty, we have greater
toleration of, and even positive demand for, collectivist schemes that
promise social security, protection from the rigors of market competition,
and something for nothing.

"You can never study Franklin Delano Roosevelt too much," Gingrich says.
But if we study FDR with admiration, the lesson we take away is this:
government is an immensely useful means for achieving one's private
aspirations, and resorting to this reservoir of potentially appropriable
benefits is perfectly legitimate. One thing we have to fear is politicians
who believe this.

-------------------------------------------

Robert Higgs, an adjunct scholar with the Mises Institute, is research
director of the Independent Institute
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