Why didn’t the Great Depression end during the FDR’s administration?


#1

When I was in undergraduate school from 1967 to 1971, the general consensus was that the Great Depression did not end until World War II. The second great war was the event at finally put an end to it. Today there is a new generation of historians who will tell that that is incorrect. They tell us “Franklin the Great’s” policies really did end it. Unfortunately, for that point of view, the economic statistics do not support that assertion.

The economy went down in 1929 and hit rock bottom in 1933. It started to get better after that but hit another pothole in 1937. It was at this time that a number of intellectuals, who were friendly to the administration, expressed serious doubts about capitalism. They started to speculate and in some cases act upon supposed merits of socialism and communism.

The fact remains that the New Deal failed to end the Great Depression. FDR’s sunny speeches and brimming image of confidence made it more bearable, and probably derailed moves to the far left, but in the end, the New Deal failed. Why was that? At least part of the answer lies in the misguided tax laws and supply side economic policies that Franklin Roosevelt and his advisers pushed so vigorously.

In 1929 the individual income tax rates ranged from 1.5% on the first $0 to $4,000 of income. It increased using many brackets to 25% on income of $170,000 or more. The corporate rate was 11% on income higher than $3,000.

In 1932, which was the last full year of Hoover administration, the individual tax rate increased to 4% on the first $4,000 and reached a high of 63% on income exceeding $1 million. The corporate tax rate was raised to 14%. In other words, under Herbert Hoover, who is not blameless for the situation, taxes actually went up during an economic depression!

The tax rates didn’t get any better during the Roosevelt years in the 1930s. In fact, they continued to go higher. By 1939 the top rate had reached 79% for individuals and 19% for corporations. At a time when the economic recovery depended upon the expansion business investment and job creation, the government was taking more and more from those who were succeeding.

At the same Roosevelt and his “brain trust” were looking for novel ways to fix the economy. One of their schemes was to find ways to raise prices. The theory was that if prices were raised, business activity would be increased. To that end, the NRA was formed. It essentially set up cartels that allowed member business to collude to set higher prices. In a famous case, a Kosher poultry plant was prosecuted for attempted to sell dressed chickens for less than the NRA set prices.

The government also got in the business of buying up surplus goods to raise prices. In one famous action which made its way to a political pin, the government bought 8 million piglets and destroyed them to drive up the price of pork.

In the end the government’s ever increasing taxes took money from the successful businesses that would have provided the support for the economic recovery. A the same to the government “supply side” moves that were aimed at increasing prices and lowing the supply of goods, interfered with the natural price rationing function that would have gotten the economy on a even keel much faster.

In conclusion, activist government made the Great Depression deeper and longer, not better.

Summary

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#2

This is also incorrect. This perceived solution to the Great Depression is as Keynesian as The New Deal. The government did not tax and spend us out of the Great Depression during the Great Depression or during World War II.

Indeed, and the end of it came after the end of the war.

This was all further demonstrated by the end of World War II. As George Gilder explains in his brilliant, recent, pathbreaking book, Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World,

“After World War II, when ten million demobilized servicemen returned to an economy that had to be converted from a garrison state to civilian needs, economists steeled themselves for a renewed depression. A sweeping Republican victory in the Congressional election of 1946, however, brought an end to the wartime government-planning regime [overregulation]. Dropping from 42 percent of GDP to 14 percent, government spending plummeted by a total of 61 percent between 1945 and 1947. One hundred fifty thousand government regulators were laid off, along with perhaps a million other civilian employees of government. The War Production Board, the War Labor Board, and the Office of Price Administration were dismantled [deregulation].”


#3

With all due respect, there are aspects of Keynes General Theory which are valid. The stimulative effects of the tax cuts under presidents Kennedy, Reagan and Trump are proof of that. The negative effects from the tax increases under Johnson and Obama prove the same point.

As for the post World War II boom economy, there was a flood of pent up demand and savings that were created by the wartime austerity. Once the war was over, there was huge demand for consumer goods that finally got the economy going and kept it going aside from minor recessions. We were also mostly done with the Roosevelt economic experiments which stifled growth in the '30s with foolish ideas like artificially raising prices, destroying supplies of goods and forming business cartels, like the NRA.

Many of FDR’s advisors didn’t know what they were doing. They were conducting experiments with the economy, often with disastrous results. Others, like Rexford Tugwell, were communist true believers who were out to seize a perceived opportunity.


#4

But also increases in Government spending, which creates a systemic issue he didn’t foresee, and which nations like Japan showcase the effects of.

He also advocates for tax increases when times are good; with seemingly little awareness of what we would later call the Laffer Curve.


#5

Keynes never could not have anticipated in 1945 when “The General Theory” was published that the western democracies would have an ever increasing welfare state, a corrupt political spending state and an ever increasing public debt to unbelievable levels. Keyes was thinking more in terms of public works, like infrastructure, where we should be spending money now.

The Lafer Curve was actually in-line with the Keynesian System. Tax cuts result in the multiplier affect which, in theory, results in greater economic growth than simply the amount returned to the private sector through the tax cuts. Increases in wages, salaries and capital gains result in greater tax receipts which can very well exceed the amount of the cuts.

Yes, I know, many of you blanch at the mention of the Keynesian Theory because you associate it with activist government. Putting the politics aside, some of his observations provide a basis for making predictions about the restults of a given public policy. And yes, in some instances tax increases are desirable to slow down and overheated economy that has reached its productive capacity, but such moves should be rare.


#6

That’s not uniquely Keynesian, and what I’m specifically referring to is the idea that the government can spend its way into prosperity for the people. That’s the main thrust of Keynesianism we all object to. Cash for Clunkers was a very Keynesian idea. All it did was time shift purchasing at the taxpayer’s expense.That’s money that was not spent somewhere it would have been better spent.

Another factor was the destruction of European production capacity during the war. U.S. production was undamaged.

Yes, it was the partial rejection of FDR’s economic policies, not wartime spending. Unfortunately, the New Deal is seen as the economic savior by modern liberals, and many conservatives confusingly credit wartime spending for economic prosperity.

I don’t think for a minute that Keynes contributed nothing, nor Galbraith or Krugman. But what we’re discussing here is what lifted the United States out of the Great Depression, and Keynesian spending policies did not do it. More “conservative” fiscal and economic policies did.

This is true, but it doesn’t mean that either The New Deal or World War II spending lifted the United States out of the Great Depression. It is that sort of thinking that has modern New Keynesian Paul Krugman saying that an imminent alien attack would spur economic growth or modern politicians of both stripes who said the hurricane hitting Houston would spur economic growth or (was it Hillary Clinton?) who said the earthquake in Haiti created an economic boom.


#7

Detroit overbuilt its roads. It has some of the best in the country, but it didn’t need them, and it keeps asking for more Federal grants to keep public sector workers employed building more.

Even Infrastructure can mean white elephants; light rail, high speed rail, even dams.

Or as what’s become even more in vogue recently, stadiums.


#8

The only time I was in Michigan, my experience with the Interstate highways was that the pavement was in awful shape.


#9

My goal here was to show that Keynesian theory provides a framework for citizens to perceive the results of various government tax and spending policies. The “progressives” picked on the Keynesian model because they perceived it as support for their big government / activist government policies. To them Keynesian theory provided them with an excuse to pursue aggressive government policies. You need to remember that Keyes died in 1946.

The Keynesian theory was much weaker in monetary policy because it did not acknowledge the effects of significant increases in the money supply. His system had to work though the changes in demand for “loanable funds” which had to work through investment demand in the Keynesian world. That was much weaker than tax increases or decreases and more or less government spending, Keynes seemed to believe that a lack of investment demand was the root cause of economic recessions and depressions, which I believe is wrong. The monetarist side, which is the classical Milton Friedman position, stated that the money supply was the more important component. If the money supply is blown out of proportion, it is, but Friedman underestimated the effects of high taxes and government regulations.

What I am telling you that both economic theories have validity and should be considered when you are evaluating public policy.uv


#10

And that’s the real problem, when your focus is simply spending, or the “velocity of money”, and you take that as the Fundamental approach to making the economy better, it’s hard to walk back the erroneous assumptions and policy that follows from that.

F.A. Hayek knew Keynes, and agreed that had he lived to see the fallout, he would have likely changed his mind.

I don’t subscribe to either; I’m Austrian in persuasion. I don’t believe the Government should have even an indirect monopoly on currency, or one it empowers to someone else.

There too much it doesn’t know, and too little to prevent interested parties from manipulating it for their own purposes. Even if those purposes aren’t entirely selfish, they aren’t a net good for the system.


#11

The United States had your currency system in place prior to the Civil War. State charter banks were empowered to issue their own money. The value of the dollars those banks issued varied with the economic health of the bank. A local bank that was financially strong might have its currency trade at 95% of its face value. A weaker bank would trade at a greater discount depending upon how unsteady it was. The currency of a failed bank was worthless. If you were a traveler and you tried to use a note from bank that was well out of the area, there would always be a discount, and in some cases merchants would refuse to take it.

Some banks were created with fraudulent intent. They issued currency but never opened their doors. They continued to issue their worthless currency until no one would take it. The legitimate banks backed their currency with silver or gold. Some banks located their redemption centers in remote locations that were hard to find. These institutions were called “wild cat banks” because you almost had to be a wild cat to find them.

On the national level president Andrew Jackson removed the Federal Government’s deposits at the Bank of the United States, which was as close as the nation had to a national bank at the time, and placed those funds in “pet banks.’ Those banks went wild issuing paper money which created a speculative land boom in the west. When the bubble burst, it became a major contributing factor to the Panic of 1837, which was one of the worst economic depressions of the 19th century. In the mean time those banks lost the government’s funds. Ultimately the government had to setup the Sub Treasury System to handle its financial affairs.

The chaotic 19th century banking system was partially ameliorated by the fact that most Americans never ventured beyond five or ten miles away from their homes their entire lives. Image today if you had to do a credit report on every piece of currency you accepted to determine what it was worth. The system would be unworkable, and we would have economic chaos. If credit cards existed, you have figure out which banks’ currencies would be acceptable to pay the balance, and how much a discount would apply to face value of the balance in your accounts.

Economic freedom does have its limits. Privately issued money has been tried, and it was always failed. There are some services government should provide, and maintaining a stable monetary system is one of them.


#12

Sure, maybe, if humans had to work on it.

But if the currencies were instead managed by an algorithm, across a ledger that is publicly, and automatically updated? No middle men required?

If the tech is good enough to navigate satellites, I don’t see what we’re doing down here that’s more complicated.

Digital currency, for a digital age. Money as code. You can get updates on the value like you do with stocks, and the code has intrinsic value, because it does something. You have a “share” in digital architecture that people use.

We have privately issued money now, it’s called Inside bank money, and its the dominant form of money we have today. Purely Government printed money is a tiny fraction of what we use.

What I don’t like, is cartelizing the monetary supply; offering control of it to a handful of oligarchs. More people should be allowed in, and they should be able to offer alternatives.

The Federal Reserve set off the worst bank panic we’ve ever experienced in 1930s, and it over-corrected the 1929 crash by eliminating Deflation, which was scapegoated as the cause.

Turns out some deflation is actually good, and the Federal reserve, has not made the value of money more stable. To the contrary:

Just because you’ve identified a problem, doesn’t mean your solution is an answer. That’s what Universal Healthcare advocates fail to realize.