Over the past few weeks the Great Depression has been discussed. Among the topics covered have been;
- The Fed sparked the Great Depression by being too active, not too passive
- The World War I debts of the US' erstwhile allies - primarily England and France - played an enormous role in both prolonging the war and later hung over the economic environment of the 1920s like the Sword of Damocles.
- The Fed did not snuff out a recovery by raising rates in 1937 or doing anything to contract the money supply. The Fed did raise the required reserve ratio for banks but the banking system was already awash in huge volumes of excess reserves.
- The economy suffered a spectacularly violent collapse in in September 1937, nearly five years after FDR's election. Voters, justifiably convinced the New Deal a complete failure, then delivered a colossal defeat to New Deal politicians in 1938.
All of these points - which are easily proven - fly in the face of the conventional wisdom that surrounds the Great Depression. In this week's discussion we will visit the contrast between FDR the candidate and FDR the president. There was an enormous gulf between these two versions of FDR, and the confusion created by these differences ground the economy to a halt. In fact, as will be seen here, the best economic performance of the 1930s occurred as a direct result of FDR's must stunning defeat as president - and the motivation behind his desire to pack the Supreme Court - the Schechter Poultry case.
One of the largest myths around the Great Depression is the one that claims Hoover adopted a laissez-faire approach to the economic collapse and trusted the economy to heat itself. In reality - and as will be discussed in another blog post - Hoover intervened in the economy like no president before. Some evidence of this can be gleaned by a speech FDR gave in the waning days of the 1932 presidential campaign. (1) In this speech, FDR castigated Hoover for making the federal government far too big, not too small! Here are just a few excerpts from this speech;
- "In the first place, what used to be analogous to an old-fashioned account book that all the family could understand has become in Washington a maze of intricate double-entry bookkeeping which only a few highly trained technical expert accountants could possibly understand." (page 4)
- "For over two years, my friends, our Federal Government has experienced unprecedented deficits in spite of increased taxes." (page 5)
- "...That means my friends that it (the cost of government) has risen from 14% to 33-1/3% of our national income...Can we stand that? I don't believe it." (Applause, loud cheering) (page 6)
- "...And when you do this (account for interest on the national debt) you find that the expenditure for the business of government in 1927 was $2,187,000,000 and in 1931 $3,168,000,000. That my friends....is the most reckless and extravagant past that I have been able to discover in the statistical record of any peacetime history of government in any part of the world." (page 9)
As this speech makes clear, FDR positioned himself as someone who would reign in the profligacy and free-spending impulses of the Hoover administration, and return the government to a more traditional role and a more traditional size. It was on this basis that FDR won the 1932 election in a landslide.
However, a very peculiar thing happened after the election in November. At the time the president was inaugurated in March, not January like today. Outside of meeting once with President Hoover, November 22, FDR completely isolated himself from the political establishment, including the congressional leadership of his own party. The economy had started to recover in late 1932 and the last thing the fragile recovery needed was a poorly managed transition between the two administrations. Yet that is exactly what FDR gave to the country.
There is an expression that nature abhors a vacuum. Well, politics and business do as well. With so little being heard from FDR, rumors swirled. By this time, FDR had begun to surround himself with a cadre of Ivy League professors, his so-called 'brain trust." (a laughable term) England - in a act of great national shame and cowardice - had abandoned its obligations under the gold standard in September 1931. (Item #5 in the chart below.) It was not surprising then - particularly so now that FDR had surrounded himself with Ivy League professors - that many people began to predict FDR would take the US off of gold as well. The effect of this is clearly visible in the chart below, see the sharp increase in interest rates in January 1933. (As people thought money would no longer be backed by gold, they took their gold-backed money to banks and asked to exchange it for gold. This prompted the sharp increase in interest rates to incentivize people to not exchange their money for gold as gold pays no interest.)
The debacle around the January 1933 rumor on abandoning gold was a harbinger of radical things to come. Not only did FDR eventually abandon gold - after first confiscating all privately held gold - see items 16 and 12 on the chart respectively - FDR initiated a serious of radical economic policies that dwarfed any of those he criticized Hoover for. The largest and most ambitious of these was the National Industrial Recovery Act (NRA), passed on June 16, 1933, (Item 14 on the chart).
The NRA established a nationwide network of codes and standards. These codes and standards where used to essentially corral and direct industry. Huge cartels were created in a wide range of industries and the cartels were used to control wages, prices and production. As is always the case, the largest companies were most eager to form cartels as cartels guarantee the largest companies remain the largest. However, the smaller more nimble companies - which produce the most new jobs - are placed in a straight-jacket. A good example of how all encompassing the NRA dictates and controls were can be seen by the NRA "Cleaners and Driers" code. The code required a price of 40-cents to be charged to press a suit. Jacob Maged of Jersey City, New Jersey had the temerity to charge 35-cents and when threatened with jail he said, "If you can send me to jail, go ahead." Soon afterward, Maged was imprisoned and was fined $100 to boot! (2)
As the chart shows, with the NRA passed the economy did not improve in any marked way, see Items 14 through 18 in the chart. The chart uses the stock market as a proxy for economic activity. (It isn't perfect in this regard but the data is the easiest to obtain and among the least ambiguous data available.) However, as the chart shows, soon after Item 18, the stock market began a rapid ascent, and this was mirrored by the economy overall. So what was Item 18? Item 18 was the Schechter Poultry case. Schechter Poultry was a case tried before the Supreme Court and and the court unanimously ruled the NRA unconstitutional! In other words, once the NRA - the linchpin of the entire New Deal - was declared unconstitutional, (the NRA gave the federal government powers authorized nowhere in the constitution), the economy roared back to life!
Yet, there are people - including almost everyone in government and the Federal Reserve today - who are convinced the New Deal - particularly big government and an activist central bank - worked. The rapid recovery after the Schechter case proves this belief completely wrong! In fact, after the NRA was declared unconstitutional, the economy would continue to grow stronger, right up until it was pole-axed by the labor unrest spurred by the Wagner Act. (3)
Sugar Land, TX
December 15, 2019
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(1) Address of Governor Franklin D. Roosevelt, Forbes Field, Pittsburgh, Pennsylvania, October 19, 1932 https://www.fdrlibrary.org/documents/356632/390886/smCampaign_10-19-1932.pdf/eda3f690-4176-4d1f-8fbf-7b432964f34f
(2) Robert P. Murphy, The Politically Incorrect Guide to the Great Depression and the New Deal, Regnery Publishing, Washington, DC p. 131
(3) "Great Depression Timeline: The New Deal and the 'Depression within the Depression.'