When it comes to events of the 20th century, perhaps none is more exuberant of persistent myths than the Great Depression. Preceded by a crash in 1929, the extreme downturn in the economy oversaw the unemployment of tens of millions of Americans and the deflation of economic activity across the board (investment, trade, farming, etc.). It is common for conventional beliefs about the Depression to involve concepts that President Herbert Hoover showcased “laissez-faire capitalist” policies that worsened it, President Franklin Roosevelt put the New Deal into action which helped tremendously, or that World War II provided the bump to get the economy out of it. Are such beliefs true? Not really.
Despite conventional talk, President Hoover was no laissez-faire capitalist when it came to economic policy. Between 1929-1932, Hoover forced businesses to heighten wages to lift prices from deflationary pressures. No surprise, the act only served to make businesses more unwilling to hire new workers due to not being able to afford them. As economists Richard Vedder and Lowell Galloway found, Hoover’s policy kept the price of labor from adjusting to the lowering of other falling prices, being a huge reason for why unemployment increased heavily after the 1929 stock market crash. Hoover was also the implementer of the terrible Smoot-Hawley Tariff Act of 1930, which heavily raised taxes on imported goods coming into the country. Considering the hardship in trade that our partners across the world were faced with as well, it is perhaps no surprise that the policy led to retaliatory tariffs that only succeeded in reducing American imports and exports by half. Historian Burt Folsom found that the tariff hikes crippled many leading industries in the trading business and cut sales across various imported products. Mr. Hoover also participated in deficit spending, putting out way more than the government took in to try and forestall the economic downturn, and put in public works programs that became policies that President Roosevelt would expand upon with the New Deal.
All of this obviously is a far cry from what is laissez-faire capitalism, which holds firmly to the government staying out of the economic engine (which makes sense since the French phrase roughly translates to “let do” ie don’t get in the way). President Hoover was very much a proponent of what would be understood as more Keynesian economic theory, ie interventionist economic policy. As research into Hoover’s actions show, they were far from successful and in fact exacerbated the situation. But to call it laissez-faire is disingenuous
President Franklin Roosevelt implemented more interventionist policy known as the “New Deal” once he entered office. However, despite popular sentiment, such policy didn’t end the hardships of the Depression, and in fact might have worsened it. Well after several years of implementation, unemployment rates still remained extremely high, all while work hours remained low. This was aided by different laws and regulations that depressed competition either by outlawing what steps employers could take in industry, limiting how prices could be changed, and how much products could be produced (with any excess usually being destroyed…a recent SCOTUS case undid just such a policy that impacted the agricultural industry). Policy like the National Industrial Recovery Act allowed certain businesses to collude in raising prices as long as they raised wages well above productivity growth. The economy cratered again in 1937 (sometimes referred to as the “recession in the depression”), being aided by heightened wages and job losses that took down several industries, particularly in manufacturing. As economists Harold L. Cole and Lee E. Ohanian found, taking all these economic dislocative policies together, New Deal policies more than likely contributed to an extension of the Depression by about 7 years. Even FDR’s own treasury secretary, Henry Morgenthau Jr., admitted in 1939 (well over 6 years after the implementation of the New Deal) that: “I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot!”. How endearing.
Claims that World War II aided in ending the Depression, despite commonly being believed, don’t appear to have much support either according to research. Even though GDP increased, such increases were aided by higher government spending and took place alongside wage and price controls. Standard of living isn’t taken into account under such readings, which more than likely didn’t improve during the war thanks to more than 10 million being conscripted for service. Consumer goods were heavily rationed, while many factories and businesses produced war goods such as tanks and artillery rather than other products. Historian Robert Higgs notes that most of national output during the war years came through increased government spending, while private contribution actually fell after 1941…never reaching pre-Pearl Harbor levels until after the war. Economists Steven Horowitz and Micheal J. McPhillips found that living standards for Americans during the war had regressed, warning of such an inverse between war productivity and the prosperity of the populace at large.
When did the Depression end? If one measures it by living standards, as Robert Higgs notes, it didn’t end until around the late 40s…well after World War II and many New Deal policies had ended. Tax rates and spending levels were lowered significantly after the war as well, which led to budget surpluses and more revenue. 1929 stock market levels were finally eclipsed in the mid 1950s.
Taken together, despite all common perceptions about the Depression and how policy and war helped in ending it, the evidence seems to show otherwise. Intervention by high-minded bureaucrats didn’t get us out, but rather allowing productivity to return it’s own way.