Economist says New Deal did not end Great Depression

Economist and author Robert Murphy is refuting what he calls the myth that the policies of the New Deal under Franklin Roosevelt helped to cure the Great Depression. Speaking before the Houston Property Rights Association, Murphy outlined the premise of his new book, The Politically Incorrect Guide to The Great Depression and the New Deal, which deals with debunking common perceptions of the era of the Great Depression.

Murphy says one of the biggest myths that has been taught about the Great Depression is that it was caused by the free market, and that Herbert Hoover sat back and did nothing. Another myth, he says, is that Franklin Roosevelt’s stirring words provided hope, and his revolutionary programs provided recovery. The alternative idea that World War II finally pulled the U.S. out of the depression is also false, says Murphy.

These myths, he says, have led to the actions our government is now taking to avoid the perceived mistakes of the past.

The thinking is that massive spending and control of the banking system are needed now, because before the Great Depression Hoover did nothing and the economy spiraled out of control. In his book, Murphy explains that contrary to Hoover’s reputation, he took numerous steps to remedy the depression, some of them continued by Roosevelt after 1932. In fact, after the 1929 crash President Hoover called a meeting of business leaders and got them to agree not to cut wages and avoid layoffs. Though wages actually rose in the early 1930’s, prices on products and services plummeted. So with profits down businesses hired fewer workers. Unemployment rose over 15% in 1931.

The idea that Hubert Hoover was for limited government was a “complete myth,” Murphy says. He calls Hoover’s reaction to the depression the “New Deal Light.” He created the Federal Farm Board to give low interest loans to farm cooperatives and buy surplus farm products. He imposed massive tax hikes on imported goods and restricted immigration. He also created the Reconstruction Finance Corporation, which extended credits of $2.3 billion to unhealthy banks and railroads. In order to decrease the deficit, Hoover and Congress enacted in 1932 what Murphy says is one of the greatest increases in taxation in the U.S. in peacetime. Surtaxes were raised from 25% to 63% on the highest incomes. Personal income taxes were raised as much as 8%. But the Hoover Administration became so mired in questionable economic decisions and corruption in bank loans that it had little defense against the attacks of the Roosevelt campaign.

In the book, Murphy explores the reasons for the crash of 1929. The prosperous roaring 20s, it is said, can be attributed to a period of laissez-faire economic principles under Calvin Coolidge which allowed the free market to grow. But in 1927 the governments of both the U.S. and England began to print more money to ease the outflow of gold from the Bank of England. This flooded the credit markets with cheap money, which in turn fueled speculators in the stock market. Then the Federal Reserve decided to reduce the flow of money and raise interest rates, causing the stock market bubble to crash.

The Roosevelt Administration just amplified what Hoover had already done, Murphy says. One of Roosevelt’s first acts was to shut down the nation’s banks and push through the Emergency Banking Act and the Federal Deposit Insurance Act. He believes that closing all the banks was not necessary because few were actually unsound. Closing the banks in effect absolved them of their responsibilities to their depositors and did not fix the problems with the banking system. Collective bargaining under the new National Labor Relations Act resulted in higher wages and higher prices, which restrained free market competition and “froze the economy” in its 1933 condition.

Government intervention in the economy made investment less attractive and it fell into the negative through most of the 1930s. This had the effect of prolonging the depression. Government supply restrictions on farm products to raise prices resulted in the destruction of food surpluses while millions of the poor went hungry. National “make work” programs failed to solve the employment problem, and in 1938 the unemployment figure had risen to 19%.

Did the onset of World War II save the economy? Not really, contends Murphy. The unemployment rate went down, he says, because millions of men were shipped off to war. But the war was “incredibly costly and represented an enormous drain on American resources.” The rise in the Gross Domestic Product (GDP) during the war was due largely to government spending on overpriced goods and services in Pentagon contracts. Murphy admits, however, that the war did have some positive effects on the economy, such as an increase in post-war exports, that eventually led to prosperity.

The last chapter of his book is devoted to lessons that can be learned today from the Great Depression, and how to avoid repeating the mistakes of the past.

Robert Murphy has a Ph.D. in economics and is now an adjunct scholar with the Ludwig von Mises Institute, a senior fellow in business and economic studies at the Pacific Research Institute and an economist with both the Mackinac Center for Public Policy and the Institute for Energy Research.

(The Banner, July 9, 2009)