Blame Washington for the Great Depression

March 15, 2021 by Dan Mitchell @ International Liberty  

There are several false narratives about economic history, involving topics ranging from the recent financial crisis to 19th-century sweatshops.

But probably the biggest falsehood, as explained in this video by Prof. Lee Ohanian, is the notion that big government saved us from the Great Depression.

The only shortcoming of Ohanian’s video is that he’s analyzing just one of President Roosevelt’s mistakes.

Yes, it is very important to explain why FDR’s corporatism was profoundly misguided, but we also should recognize that he had terrible fiscal policy as well. 

 

Roosevelt had two competing camps of advisers on the budget, one of which wanted to borrow and spend, while the other wanted to tax and spend. Sadly, both groups enjoyed plenty of victories.

With so many policy mistakes, we shouldn’t be surprised that the economy remained mired in a depression for an entire decade.

What’s tragic is that most of that suffering could have been avoided if FDR and his appointees simply remembered how President Harding a dozen years earlier had cut taxes and spending to rescue the economy from a deep downturn.

Let’s look at some additional analysis.

Writing for CapX, Tim Worstall explains how FDR’s blundering made things worse, especially compared to what happened in the United Kingdom.

…what caused the Great Depression was a series of bad political choices… The British…government cut spending and things turned out rather better than that in the US. …the much worse American experience was a direct result of the huge expansion of government. Far from saving the US economy, Roosevelt’s various interventions actually prolonged the agony. …The Depression was over in the UK by 1934. …the American disaster toiled on rather longer. So, what were the big differences? …the UK cut state spending… FDR boosted the role of the federal government in many ways. …the National Recovery Administration, which was a disastrous attempt at managing prices. …the imposition of cartels upon both business and agriculture. This suite of ill-advised measures delayed the recovery.

The only good news is that we didn’t get a resuscitation of those policies after World War II, which meant the economy had a chance to finally recover.

So what’s the moral of the story?

As Larry Reed wrote for the Foundation for Economic Education, the Great Depression was caused by a series of foolish interventions by politicians in Washington, and we need to remember that lesson so we don’t repeat the mistakes of history.

The history of the Great Crash and subsequent Depression provides a sad litany of policy blunders in Washington. Altogether, they needlessly caused and prolonged the pain; roller coaster monetary policy, sky-high tariff hikes, massive tax increases, government-supervised destruction of foodstuffs, gold seizures, price-fixing regulations, soaring deficits and debt, special favors to organized labor that stifled investment and boosted unemployment. …myths and misconceptions about our most calamitous economic episode abound. Fortunately, recent scholarship is slowly changing that. The simplistic, error-filled assumption that free markets failed and government rescued us—once conventional “wisdom”—no longer gets by unquestioned.

For further information on the Great Depression and bad government policy, you can watch other videos here and here.

P.S. Walter Williams and Thomas Sowell both have written on the issue as well.

P.P.S. With regards to economic policy, FDR was an awful president. And he would have been even worse had he succeeded in pushing through his plan for a 100 percent top tax rate and his proposal for a so-called economic bill of rights.