Birds of a feather drive together.
We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.
–Rex Tugwell, a member of FDR’s “Brain Trust”
It would be well established that Franklin Roosevelt, along with his predecessor Herbert Hoover, was directly responsible for prolonging the Great Depression were it not for a Democratic/progressive meme factory long devoted to laying the blame on Hoover and Wall Street fat cats instead, the same as with the housing mortgage bubble of 2008 and Barack Obama’s subsequent extending of the malaise from that. Objective studies have pointed to FDR as mismanaging the recovery, for example, this one: FDR’s policies prolonged Depression by 7 years, UCLA economists calculate.
But, there’s a lot to be learned from breaking the Great Depression apart. For one thing, Roosevelt was not the bad guy… Hoover either. The bad advice they ruinously followed came from British economist John Maynard Keynes. To make matters worse, Baron Keynes was almost solely responsible for the depression in the first place.
Ending a Recession/Depression
There are two general approaches to ending a recession or depression. The approach from classical economics is based on Say’s Law:
As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.
–Jean-Baptiste Say, 1803
This is casually referred to as the Supply Side approach, as the idea is to channel capital to capitalists with which to build a greater supply of goods in order to end the malaise.
But, if Say’s Law holds, there is zero argument on behalf of social democracy, and Baron Keynes was a foremost proponent of social democracy. In fact, to his credit, he was probably the foremost agent responsible for steering the American left away from communism and fascism and instead to the left progressivism that favors social democracy.
He made a name for himself with a book published just after World War I that argued that money can be a temporary store of value. That controversial notion gave politicians a bit of wiggle room to meddle with bad economies rather than back off and let the industrialists work their craft. Roughly three years after FDR assumed office, Keynes’ came out with his masterpiece, The General Theory of Employment, Interest and Money, “general” to imply that Say’s Law did not work in all situations, especially high unemployment. He claimed his would, and his put politicians at the helm working fiscal policy. Because his grand idea is to channel money to consumers [read: voting constituencies], the approach is commonly dubbed Demand Side.
Unfortunately, adding money to the buying side is the very definition of inflation, and inflation adds to rather than ends economic malaise. The Depression of 1920–21 that started out with bigger metrics than the Great Depression was swiftly over thanks to Warren Harding’s use of a Supply Side approach. Recessions handled that way typically feature a short duration with a strong rebound. Even Truman’s response to the Recession of 1949 was to declare he would “do nothing.” And making that claim and sticking with it is considered a Supply Side approach.
Our two depressions handled according to Keynes, however, were deep and prolonged. The Great Depression was handled by classical Keynesian theory, while, after that theory was disproved (Keynes had claimed the stagflation that appeared in the Carter years–high inflation and high unemployment together–to be an impossibility under his theory), the present administration has resorted to New Keynesian economics.
This chart clearly depicts the difference in recessions handled Supply Side versus the one handled Demand Side. The two long, shallow recessions of the Bush presidencies were handled part-and-part.
How to Start a Worldwide Depression
During World War I, all the leading economies suspended the Gold standard in order to be able to inflate away their war debt, inflation being essentially a tax, a particularly regressive one, that allows governments to pay their bills with cheapened currency. The Genoa Conference (1922) was convened to put the world economy back on a gold standard.
At the conference, Keynes, enjoying his new celebrity and joined by Prime Minister David Lloyd George, committed two frauds and a major blunder. The gold standard had known problems. Keynes was successful in arguing for a new beast, a Gold exchange standard. Fraud one was that the Pound Sterling was to be restored, for reasons of British pride, to its pre-war valuation of $5.00 rather than its post-war valuation of $3.50. Fraud two was that the pound along with the dollar was to be a Reserve currency, despite the fact that the UK had little gold left after the war, having paid for much of its war materiel in bullion. And the blunder was that reserve currency status would turn out to make the reserve currency, in this case the dollar, overly strong (Strong Currency).
The policies of the conference were implemented starting in 1926, and the pound-valuation fraud started steadily roiling world stock markets, leading to crashes including the Wall Street Crash of 1929 (an event often pointed to as the cause of the Great Depression, but crashes are symptoms and symptoms cannot be causes).
The Great Depression was actually a recession followed by three separate depressions as you can clearly see in the chart above. Keynes’ first fraud, the 43-percent over-valuation of the pound, led to the recession starting in 1929. Keynes’ blunder led to the first depression late in 1930 with passage of the disastrous Smoot–Hawley Tariff Act in hopes of bolstering America’s flagging exports. Keynes’ second fraud kicked in later in 1931 when France, exasperated by British foot-dragging on war payments, demanded payment in gold, exposing the fraud when Britain abruptly bowed out of reserve-currency status. Finally, we get the Roosevelt Depression (Recession of 1937–38) owing in large part to policies Roosevelt implemented after receiving his gift copy of Keynes’ The General Theory.
Do note that from inauguration day 1933 for the next four and a half years, the depression steadily (but ever so slowly) recovered under Roosevelt, the reason, no doubt, he is generally given credit for a decent job of recovery. In fact, one step insured the turn-around from the month in 1934 that FDR acted on advice from a Republican under-secretary of agriculture who’d managed to catch his ear. The man pointed out that we’d overprinted dollars for use as an overseas reserve which made us vulnerable to having our gold reserves wiped out. Against strenuous opposition from Bernard Baruch and other members of his Brain Trust, Roosevelt repegged the dollar from its century-plus-long value of buying 1.5 grams of gold to the new value of 0.85 grams. Everybody who owned dollars had just taken a 43-percent “haircut,” but the move meant the dollar was no longer overly strong (and our 8500 tons of Fort Knox gold was worth that much more), and recovery got underway, at least until FDR’s disastrous policies of 1937.
Hoover and Roosevelt
Under two liberal presidents, Harding and Coolidge, we got the Roaring Twenties and a significant economic boom from lowered taxes and spending. The top marginal rate was lowered to only 25 percent. Coolidge made relentless fun of Hoover and even predicted his fiscal flailing.
Hoover was a California Republican and FDR a New York Democrat… utterly different politics, right? Not at all. Hoover was a progressive–not a right progressive in the mold of McKinley, (T.) Roosevelt and Taft, but a left progressive. He ran as a Republican for the simple expedient that you had to be Republican to be elected from California in those days.
Contrary to the claims of many historians on the left, Hoover used Demand Side measures, jacking federal spending steadily over his four years by 63 percent, from $3.127 B in 1929 to $4.659 B in 1932, the same year in which he raised the top marginal income tax rate to 63 percent. And disastrously, he listened to the likes of Henry Ford on wage policy.
Just as Obama successfully ran to the economic right of John McCain in 2008, FDR ran to the right of Hoover (The New Franklin Roosevelts). Once in office, however, he reverted to his native politics. By 1936, he had overseen a rise in the top tax rate to 79 percent, one of the causes of the Roosevelt Depression. Naturally, the progressive narrative coalesced around and remains that a right-wing, business-loving Hoover slashed taxes and spending in order to boost the wealth of the “top one percent” and by doing so engineered a stock crash and the Great Depression. Then Roosevelt came along to raise taxes and spending and save the day. That narrative is absolutely bogus.
And so Roosevelt is wrongly credited with ending the Great Depression, credited in order to further social democracy and the myth that having politicians control the fiscal levers is the way to run an economy. Were that true, Roosevelt and Obama would have presided over booming economies.
NOTE: One of the memes peddled by the left is that FDR oversaw the strongest prolonged growth of the century. That, of course, is giving him undue credit for the natural tendency of recessions and depressions to rebound and, in his case, the atypical amount of time the rebound took. As can be seen from the Percent Job Losses chart above, recessions handled Supply Side bounce back in a matter of months. As can be seen from the chart of Great Depression unemployment, the Keynes-caused recession and two depressions were reaching a point of rebound when FDR took the reins, but he turned that into a slow recovery over the course of years, just as Obama has, and for the same Keynesian reasons. He then, before we were out of the depression, added a third depression of his own making. In fact, it was only our production to arm Europe for war that ended the depression. Contrast that to Harding’s handling of the depression he was handed from Wilson, which his policies turned around before the first conference he called had even convened, and you clearly see why FDR deserves no credit whatsoever.