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Tuesday, May 06, 2008

Lawrence Reed on The Great Depression

see Great Depression Myths (extended excerpts) and full article:
The Great Depression was not the country’s first depression, though it proved to be the longest. Several others preceded it. The calamity that began in 1929 lasted at least three times longer than any of the country’s previous depressions because the government compounded its initial errors with a series of additional and harmful interventions.

The central bank took further deflationary action by aggressively selling government securities for months after the stock market crashed. For the next three years, the money supply shrank by 30 percent. As prices then tumbled throughout the economy, the Fed’s higher interest rate policy boosted real (inflation-adjusted) rates dra­matically.

Though modern myth claims that the free market “self-destructed' in 1929, government policy was the debacle’s principal culprit. If this crash had been like previous ones, the hard times would have ended in two or three years at the most, and likely sooner than that. But unprecedented political bungling instead prolonged the misery for over 10 years.

Smoot-Hawley by itself should lay to rest the myth that Hoover was a free market practitioner, but there is even more to the story of his administration’s interventionist mistakes. Within a month of the stock market crash, he convened conferences of business leaders for the purpose of jawboning them into keeping wages artificially high even though both profits and prices were falling. As economist Richard Ebeling notes, “The ‘high‑wage 'policy of the Hoover administration and the trade unions ... succeeded only in pricing workers out of the labor market, generating an increasing circle of unemploy­ment.”

Commenting decades later on Hoover’s admin­istration, Rexford Guy Tugwell, one of the architects of Franklin Roosevelt’s policies of the 1930s, explained, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”

Though Hoover at first did lower taxes for the poorest of Americans, Larry Schweikart and Michael Allen in their sweeping A Patriot’s History of the United States: From Columbus’s Great Discovery to the War on Terror stress that he “of­fered no incentives to the wealthy to invest in new plants to stimulate hiring.” He even taxed bank checks, “which accelerated the decline in the availability of money by penalizing people for writing checks."

Compounding the error of high tariffs, huge subsidies, and defla­tionary monetary policy, Congress then passed and Hoover signed the Revenue Act of 1932. The largest tax increase in peacetime history, it doubled the income tax. The top bracket actually more than doubled, soaring from 24 percent to 63 percent.

Can any serious scholar observe the Hoover administration’s mas­sive economic intervention and, with a straight face, pronounce the inevitably deleterious effects as the fault of free markets?

Economist Jim Powell ... points out that “Almost all the failed banks were in states with unit bank­ing laws” — laws that prohibited banks from opening branches and thereby diversifying their portfo­lios and reducing their risks. Pow­ell writes: “Although the United States, with its unit banking laws, had thousands of bank failures, Canada, which permitted branch banking, didn’t have a single failure ...” Strangely, critics of capitalism who love to blame the market for the Depression never mention that fact.

Roosevelt secured passage of the Agricultural Adjustment Act, which levied a new tax on agri­cultural processors and used the revenue to supervise the wholesale destruction of valuable crops and cattle. Federal agents oversaw the ugly spectacle of perfectly good fields of cotton, wheat, and corn be­ing plowed under (the mules had to be convinced to trample the crops; they had been trained, of course, to walk between the rows). Healthy cattle, sheep, and pigs were slaugh­tered and buried in mass graves. Secretary of Agriculture Henry Wallace personally gave the order to slaughter six million baby pigs before they grew to full size. The administration also paid farmers for the first time for not working at all.

Benjamin M. Anderson writes, “NRA was not a revival measure. It was an antirevival measure. ... Through the whole of the NRA pe­riod industrial production did not rise as high as it had been in July 1933, before NRA came in.”

Roosevelt next signed into law steep income tax increases on the higher brackets and introduced a five-percent withholding tax on corporate dividends. He secured another tax increase in 1934. In fact, tax hikes became a favorite policy of Roosevelt for the next ten years, culminating in a top income tax rate of 90 percent. Senator Ar­thur Vandenberg of Michigan, who opposed much of the New Deal, lambasted Roosevelt’s massive tax increases. A sound economy would not be restored, he said, by following the socialist notion that America could “lift the lower one-third up” by pulling “the upper two-thirds down.”

Columnist Walter Lippmann wrote in March 1938 that “with almost no important exception every measure he [Roosevelt] has been interested in for the past five months has been to reduce or discourage the production of wealth.”

As pointed out earlier in this essay, Herbert Hoover’s own version of a “New Deal” had hiked the top mar­ginal income tax rate from 24 to 63 percent in 1932. But he was a piker compared to his tax-happy succes­sor. Under Roosevelt, the top 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.

The relent­less assaults of the Roosevelt ad­ministration — in both word and deed — against business, property, and free enterprise guaranteed that the capital needed to jump-start the economy was either taxed away or forced into hiding. Not until both Roosevelt and the war were gone did investors feel confident enough to “set in motion the postwar investment boom that powered the economy’s return to sustained prosperity.”

Those who can survey the events of the 1920s and 1930s and blame free-market capitalism for the economic calamity have their eyes, ears, and minds firmly closed to the facts. Changing the wrong-headed thinking that constitutes much of today’s conventional wisdom about this sordid historical episode is vital to reviving faith in free markets and preserving our liberties.

Note: If you read the full article, I disagree with the authors' characterization of the state of social security. A minor adjustment to retirement age buys substantial time to complete a fix.


Harry Eagar said...

Then why did solvent banks close?

The problem was not insolvency although that was certainly a problem.

The problem was illiquidity.

Bret said...

Liquidity's hard to find if you tax and confiscate every dollar that moves.

Harry Eagar said...

Taxes were extremely low in 1932.

And, besides, there had been liquidity catastrophes in, eg, 1837 when there weren't any taxes at all.

Markets fail.

Bret said...

"Markets fail."

No kidding. Both bloggers here at this blog and probably all of the other readers here understand that markets sometimes fail so it's neither an enlightening nor interesting statement.

It's not a useful statement either because everything fails. Cars fail and we still drive cars. Airplanes fall out of the sky and yet we still fly in them. Heck, crops fail, but we still plant 'em and rely on them for food. So markets fail, but that in no way doesn't mean we ought to forego using them.

On the other side of the coin, Howard and I DO support certain types of government intervention in markets. It's true that we don't support government interventions in markets very often, but we're not so ideologically rigid as to reject all interventions out-of-hand.

The market obviously did fail during the great depression. The questions that are being examined in these last three posts by Howard are why did the market fail and why did it fail so badly and take so long to recover? The government could probably have intervened in positive ways. The question is whether or not those interventions were positive or whether mistakes were made. The last three posts provided an alternate viewpoint that questions the policies and actions of the Hoover and Roosevelt administrations. Surely you can at least agree that Hoover made some mistakes?

Harry Eagar said...

No, the markets were operating as Hoover wanted and expected them to operate.

It is not widely understood that Hoover's fortune derived from shady market operations. Sir Robert Hart, the inspector general of customs in Imperial China, considered him an out-and-out crook.

Hoover's troubles were not the result of some inadvertent ripple in otherwise handy markets -- what my physics adviser calls a Selden-crisis after the fictional Harry Selden. They were built-in
parts of the system, and Hoover's secretary of the Treasury, Mellon, notoriously welcomed the break.

joe shropshire said...
This comment has been removed by the author.