May 7, 2004


How FDR Made the Depression Worse (Robert Higgs, February 1995, Free Market)

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.

For an excellent and impartial look at the futility, even counter-productivity, of the New Deal try David Kennedy's entry in the Oxford History of America, Freedom from Fear.

Posted by Orrin Judd at May 7, 2004 8:12 AM

Here is another good essay on the subject.

Posted by: Paul Cella at May 7, 2004 9:08 AM

My son is taking the AP American History test this morning. I told him that the correct answer to any question about the Great Depression and the New Deal is that Roosevelt was the Poor Man's Friend, and that the important thing was that the New Deal showed that the government cared about the problems of the poor. I also explained the truth.

Posted by: Robert Schwartz at May 7, 2004 11:02 AM

"The combined impact of Herbert Hoover's and Roosevelt's interventions meant that the market was never allowed to correct itself."

You could say the same thing now about the Federal Reserve's and the Administration's intervention in interest rates and tax policy to prop up the bond and stock market bubbles. These markets need to correct themselves, but noone wins elections by allowing markets to correct themselves.

Posted by: Robert Duquette at May 7, 2004 11:28 AM

Except that interest rates and taxes remain historically high.

Posted by: oj at May 7, 2004 12:18 PM

Interest rates are historically low, not high.

Posted by: Robert Duquette at May 7, 2004 12:25 PM

High. With no inflation--other than artificial oil-related hikes--interest rates have been high for over a decade.

Posted by: oj at May 7, 2004 12:32 PM

The collapse of the agricultural sector (and the cascade that followed it, like the country banks) happened years before Roosevelt took the country off gold. Furthermore, none of those people handled many double eagles to begin with.

This is the kind of gold-bug lunacy that results when you fit practice to theory instead of the other way around.

Agriculture, which provided the direct or immediate economic support for 40% of the country, had been liquidated before Hoover even came into office.

Once it's been liquidated, that's it, you cannot keep liquidating it.

Earlier this year, Orrin was quite concerned about deflation, though he hasn't said much about it lately. He's right to be worried about deflation in the abstract, though wrong to think it's imminent; but it's weird to be theoretically concerned about deflation and to simulataneously scout the only people in this country who ever did actually have to do something about it.

We know more or less how to get a handle on inflation, but nobody is really sure how to reflate.

Posted by: Harry Eagar at May 7, 2004 2:50 PM

We have deflation. It will be a m,istake for the Fed to start raising rates and if Greenspan is serious could cause a slowdown in '05. There's a brief spike in oil prices due to overregulation. But there'll be gluts next year--as Iraq pumps more and Venezuela & Iran change regimes

Hoover and FDR should have returned tax dollars to the people instead of taking more for the government and then trying to spend "wisely".

Posted by: oj at May 7, 2004 4:02 PM

OJ, rates are going up whether the Fed follows along or not, just not as fast. Stocks and bonds are tanking again on the good news of job growth. Inflation is on the way - the longer Greenspan dithers, the worse it will be.

Posted by: Robert Duquette at May 7, 2004 4:21 PM

He raised rates because of the last blast of job growth and caused a recession.

Posted by: oj at May 7, 2004 4:27 PM

and he (Greenspan) seems poised to play the second verse of that same ole song, right down to carping about the deficit.

Posted by: Chris B at May 7, 2004 4:43 PM

Yes, recession is the way that the economy corrects itself. Don't believe for a minute that the government can eliminate recessions, they can only postpone them, thereby making them worse when they finally arrive. It took 13 rate cuts and mountains of debt on the part of consumers, corporations and the government to get the economy started again, and the prospect of the first interest rate rise is turning the markets south again.

Remember, the equity markets are leading indicators. The smart money knows what lies ahead, and is getting out. You have a lot of variable rate consumer debt out there, much more than in 1994. Any increase in rates will impact consumer spending. Stock and bond market losses will work against the "wealth" effect.

Never let your political preferences guide your view of the economy. I've seen way too much economic boosterism on the part of Republicans. Sentiment is as complacent or moreso than before the downturn in 2000. The real experts on the economy, people like Warren Buffett and Bill Gross, are not bullish.

Posted by: Robert Duquette at May 7, 2004 5:01 PM

Rate hikes will cut spending but inflation will come?

Posted by: oj at May 7, 2004 5:04 PM

Ever hear of stagflation?

Posted by: Robert Duquette at May 7, 2004 5:56 PM


Yes. Think unemployment is headed up?

Posted by: oj at May 7, 2004 6:34 PM

William B. Meyer, in his book Americans and Their Weather, points out that the large majority of agricultural workers who went to California, were not in fact Okies fleeing the Dust Bowl. They were ex-sharecroppers from the South, fleeing pro-landowner and anti-production government policies. "Most migrants to California were victims less of the direct effects of bad weather than of measures taken for protection against good weather." (p. 162)

Posted by: Bob Hawkins at May 7, 2004 6:47 PM


Posted by: Robert Duquette at May 7, 2004 7:45 PM


So, you're calling for:

Rising unemployment
Rising interest rates
A stock, bond, real estate bubble burst

and rising inflation?

Welcome to Weimar!

Posted by: oj at May 7, 2004 8:29 PM

Bob, Meyer can say that but he can't make me believe it. I am old enough to have talked to the people who were liquidated in the '20s. Liquidated is liquidated.

Once a bank fails, you cannot revive it. You have to start over.

Same with farms.

Robert, recessions are just the bottom dip in the sigmoidal curve of a dynamic system centered on a rolling average. Therefore, you are right, you cannot avoid the dips.

But you don't have to roll off the cliff. Kindleberger, "Manias, Panics and Crashes," explains why lenders of last resort have dampened the swings down since 1945.

The anti-FDR theorists have conveniently forgotten the advice their forebears were giving in the late 1920s: "Liquidate steel, liquidate copper" etc.

Fine if you have some solid assets, which is what Rockefeller meant when he assured the country that he and his son were buying up attractive stocks.

Guys who ran insolvent banks, however, were not picking up attractively priced stocks.

Posted by: Harry Eagar at May 7, 2004 8:42 PM


Exactly. You can only prolong them artificially, which is what Hoover and FDR did.

Posted by: oj at May 7, 2004 8:49 PM

Just for the record, Niven and Pournelle called this way of thinking "Crazy Eddie" in their classic SF epic _The Mote in God's Eye_.

Posted by: Joe at May 7, 2004 10:27 PM

Harry, I don't know that we will fall off a cliff, but we will have to move downhill at some point. I'm thinking of the 1970's as a model of what we will go through this decade. That is actually the rosy scenario. The problem now is that Americans are way more leveraged now than they were back then. Greenspan is trying to avoid raising rates because the inflation we are seeing now, in food, fuel and commodities (things that the core CPI leaves out) isn't showing up as income inflation yet. In this scenario, without growing incomes, increased rates will negatively impact consumer spending, which is 70% of GNP.

Much of the consumer debt that was added in the last 3 years will end up being bad debt. The government will print money to liquidate it.

My point is that noone on the Republican side is even talking about the risks that the economy is facing right now. Noone knows exactly how it will turn out, but there should be no complacency. It is foolish to put trust in the Federal Reserve and the Administration that they can steer the economy through these problems without igniting either high levels of inflation or deflation.

Posted by: Robert Duquette at May 8, 2004 2:09 PM

Robert, I'm with you on the risks. The phenomenon that Orrin and people like him think is so swell can also be described as the increasing commodification of sector after sector that never was commodified before.

We may not know much about how economies really work, but we can be pretty sure that commodified systems are more unstable than inefficient systems.

There ain't no free lunch, and inefficiency is a powerful insurance factor.

As for the Depression, the market theorists aver that there is always a market-clearing price. But in the Coolidge collapse there was not. People used corn for boiler fuel because there were no takers at any price.

Posted by: Harry Eagar at May 9, 2004 4:51 AM

Of course there was, it was just below that of fuel.

Posted by: oj at May 9, 2004 8:08 AM

No, it was zero. Corn was worth not only less than fuel, it was worth less than the cost of moving it from one spot to anotehr.

Same for many other commodities, too.

Sales of phonograph records, to take another example, dropped from $104 million to $6 million.

How much more liquidation can you want?

Posted by: Harry Eagar at May 9, 2004 6:07 PM

$0, which is what it is today. If something is worth zero it costs zero and people find other industries.

Posted by: oj at May 9, 2004 6:44 PM

But at the time, people did not find "other industries."

They just quit recording music for years.

W. Edwards Deming used to use the exmaple of carburetors. The carburetor manufacturers made better and better devices, because they thought they were in the business of making carburetors.

Really they were in the business of metering fuel, and that was taken over by fuel injection.

Phonograph records were not a goal, the goal was to reproduce music. A lot of guys whose sound was reproduced during the '20s and '40s left us nothing from what they did in the '30s, because the technology had been liquidated.

That's markets in action, but who wants that kind of action. Not Memphis Slim.

Posted by: Harry Eagar at May 10, 2004 6:10 PM


That's how markets work. They're a bit brutal but they're efficient. Hoover and FDR unfortunately intervened to reduce their efficiency and thereby prolonged the "adjustments"

Posted by: oj at May 10, 2004 6:35 PM