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Monday October 13, 2008 9:59 am

The Myth of FDR




Posted by George Regal Categories: History, US Economy

FDRThe Great Depression was brought about as a result of monetary inflation (68%) from 1921-1928. (See: What is the Federal Reserve Doing?) There were other factors involved, but this was the primary factor. This was mostly the result of “easy credit” (a recurring theme isn’t it?). Credit expansion, as we have seen again, leads to malinvestment. John Maynard Keynes, the father of Keynesian Economics, called Federal Reserve policy (1921-1928) a triumph in currency management. Hey, good call John!  It’s amazing that Keynesian Economics is still with us.

The inflation fueled boom and resulting depression are often blamed on Herbert Hoover and his laissez-faire policies. Nothing could be further from the truth and we need to look no further than Hoover’s words from the 1932 presidential campaign.

“We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.”

So much for laissez-faire!  Hoover was the father of the New Deal; FDR just expanded it and made it his own.  Hoover pursued a policy of government intervention that was unprecedented. It’s Interesting that Hoover and FDR both pursued similar policies, and both produced similar results, yet one is vilified and one is exalted. Go figure!

Enter the Savior!

Franklin D. Roosevelt believed that low prices were the major problem with the economy, in reality; it was the overproduction (another recurring theme) from an inflation fueled boom. FDR attacked Hoover for running deficits and adding to the national debt, yet FDR’s deficit in his first 100 days was larger than Hoover’s was the previous 2 years combined. The National Recovery Administration then set out to do exactly what Hoover attempted to do, prop up wages and prices. Artificially setting wages above what the market will bear leads to unemployment, which remained in double digits throughout the 30’s. Artificially setting prices above what the market will bear leads to surpluses, and this also continued throughout the 30’s. The market needed to adjust, and neither Hoover, nor FDR allowed it to do so.

To keep prices from falling and destroying the expected recovery, The USDA was ordered to pour milk into sewers until prices rose again. Six million pigs were slaughtered, and ten million acres of cotton were also destroyed in an effort to bolster prices. The NRA attempted to bring industries into cartels that, in conjunction with government, would set production, prices, and wages. (Didn’t the Soviets try this?) Those who violated the rules would be prosecuted. A New Jersey tailor was jailed for pressing a suit for 35 cents when the NRA set the price at 40 cents. I tell ya, I just can’t get enough salvation like that!

The NRA was modeled on what Mussolini did in Italy (Boy, there’s a role model for you!) and was rightfully struck down by the Supreme Court in 1935. FDR continued to introduce legislation that increased taxes, spending and regulation, and none of it ended the depression. Unemployment remained in double digits, and the economy experienced a few short spurts that always stalled out. This is not a success.

The monetary inflation (100%) that occurred from 1933-1939 eventually overcame FDR’s price controls.  The supply of money was finally aligned with prices for the first time in a decade.  FDR didn’t save us from the depression, but both he, and Hoover adopted policies that deepened and prolonged it. World War II also had an impact, mostly on unemployment since large numbers of draft eligible men were placed on the government payroll, but the depression didn’t officially end until Harry Truman ended the New Deal a few years after the war.

We have failed once again to learn the lessons of history, and once again are trying to prop up prices, in this case home prices. Unfortunately, these lessons aren’t taught in school. Education is more about political agendas than it is about teaching.

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