Why the Great Depression was so great – Part I

When everything is said and done, inconvenience is without a doubt, the greatest barrier to truth. If someone wishes to reject a set of facts and look at a different set of more convenient facts, one can only discover half truths. In many cases, political agendas act as blinders for people on both sides of the aisle, but in no particular case are blinders more prevalent when talking to everyday Americans about the Great Depression.

For example, most people you talk to about the Great Depression will say, “FDR’s New Deal got the US out of the Great Depression.” And that “Hoover caused the crisis by doing nothing about it.” This is quite perplexing, considering not an ounce of it is true.

Some will believe the Great Depression began following the stock market crash of 1929. This is not true. Unemployment never hit double digits in the year following the stock market crash. It rose to nine percent for a two month period, and then began its descent the following months. By June 1930, the unemployment rating was as low as 6.3 percent.

Then, sadly, Hoover and the Congress intervened, and the apparent recovery was put on hold. They started by signing off the Smoot Hawley Tariff Act – a policy that raised tariff rates on U.S. imports. US imports and exports fell dramatically from 1929 to 1933 as a result, and the economy continued to struggle. When the holidays rolled around in 1930 the unemployment rating jumped to 8.7 percent.

By 1932, 40 percent of the banks failed and Hoover stepped in with his Reconstruction Finance Corporation. Put simply, the RFC was nothing but a bailout for banks and a cluster of public works projects.

(Sound familiar?)

He also, unbeknownst to many, intervened in the business community, on a very large scale. Hoover publicly urged businessmen in the US to not cut wages. Many listened…and destructive it was.

This policy, as well intended as it was, actually kept more workers out of the work force. It’s a simple example of distorting supply and demand. As Murray Rothbard explains in, America’s Great Depression, the quantity of labor is cut short when the price for labor is propped up through coercive means, especially when economic output falls. With this policy, the currently employed saw virtually no impact on their wages. But what about the people looking for work? What about the unemployed? If wages cannot fall in a depressed economy, the pool of available labor for businesses to demand shrinks, and unemployment rises. Stated differently: the economy after the bust was depressed and less productive overall, but the wages that were being paid to workers, did not reflect the economy’s unproductive use of resources at the time. It destroyed employment in the US. Big time.

Hoover wasn’t done, though. He finally put the icing on the cake when he raised top income tax rates from 25 percent to 63 percent. What happened the following year? The unemployment rating rose to 23.6 percent. The depression becomes “Great.”

When it was all said and done, Hoover increased spending, raised taxes and intervened in the economy. Hoover was by no means a limited government, “let the markets work things out” kind of president. No matter what our high school textbooks tell us.

In 1933, Hoover exited and FDR entered with more government intervention into the economy. Intervention is intervention, no matter whose face you attach to it, and FDR’s New Deal never saved the day. Even with FDR’s charisma and confidence, there wasn’t a single month where the unemployment rating was below double digits during the rest of the decade.

I wouldn’t necessarily call that a track record of success.

John Adams once said, “Facts are stubborn things.” Though, as we’ve learned over the years, it takes people just as stubborn to disregard them.