A Cure for the Depression

The economic crisis the United States is going through has been compared in the media with “The Great Depression” of the 1930s. The proposed solutions to the problems facing the U.S. also harken back to that era.

FDR and the “New Deal”

One of the ideas that the media puts forth is that Franklin D. Roosevelt and the “New Deal” stopped the Great Depression and saved the American economy. A second New Deal therefore, should be able to save today’s economy. A closer look at FDR’s policies will reveal that the New Deal did not solve the Great Depression; it did not save capitalism, it actually prolonged the Depression and vastly expanded government’s reach. Previous U.S. depressions, like the panic of 1837 and the depression after World War I that started out worse than the Great Depression, had ended more quickly and with less pain.

While Franklin Delano Roosevelt is hailed as the savior of American capitalism, FDR, in fact, did more than anyone else to usher in the era of big government and loss of personal freedoms. Perhaps it should not be surprising that so many people promote big government, because its story has been dominated by political historians who focus on the personalities, speeches, election campaigns, and other aspects of the political story. The economic story does not receive the same amount of coverage, especially in today’s culture where any event that occurred over a week ago is considered “old news.”

A hard look at the economic policies of the Roosevelt Administration and its New Deal reveals that it actually harmed the very people it was supposed to help.

The New Deal: A New Era of Taxation

Several dozen economists at nationally known universities¹ have done an in-depth study of the era and came up with some interesting facts. Among the major findings are that FDR increased federal taxes from $1.6 billion in 1933 to $25.3 billion in 1940. Taxes of all kinds were levied on the American people: personal income taxes, corporate income taxes, excise taxes, inheritance taxes, and “excess profits” taxes all went up during the New Deal.

The most important source of New Deal revenue was the excise tax levied on alcoholic beverages, cigarettes, matches, candy, tires (including tires on wheelchairs), telephone calls, and much more.

The New Deal was substantially financed on the backs of the middle class and poor people. Even to hear FDR’s fireside chats one had to pay the federal government excise tax on radios and on the electricity needed for radios to operate.

FDR’s tax hikes in 1933, 1934, 1935, and 1936 made it harder for investors to estimate the risks of investing in new businesses, thus limiting job growth. In 1932, the year that Franklin Roosevelt was elected president, the maximum income tax rate was 25%. Back then, only about 5% of Americans paid any income taxes. By 1945, two thirds of American families were paying federal income tax and it started at 24%. From there it then increased to a maximum of 94%.

Tax withholding from income was introduced for the first time. Withholding the tax directly from a person’s paycheck allowed the government to use it right away rather than having to wait for “tax time.”

On the Senate floor on May 14, 1943, Senator Happy Chandler (D-KY) said, “All of us owe the government; we owe it for everything we have—and that is the basis of obligation—and the government can take everything we have if the government needs it.” Chandler wanted to be clear on this point. “The government,” he added, “can assert its right to have all the taxes it needs for any purpose, either now or at any time in the future.”

Because of the higher taxes, consumers had less money to spend. Employers had less money for growth and jobs. FDR’s policies discouraged investors from taking the risks of funding growth and jobs, keeping the nation’s unemployment rate stubbornly high. Unemployment in the Great Depression rose from 16% in 1931 to a high of 25% in 1933 and stayed close to 20% up to the start of World War II. (It is difficult to compare unemployment rates today with Depression years as the government has changed how it measures unemployment. For example, today people who are “underemployed” or have given up looking for work or have used all their unemployment benefits are no longer considered “unemployed.”)

FDR attacked private property rights by seizing private land, driving private utilities out of business, arbitrarily seizing privately held gold, telling businesses how much they must charge for their products, how much they must pay people, how much they must produce and where they may and may not sell it. FDR denounced investors as “economic royalists, privileged princes, and economic dictators,”² leading many investors to conclude that it wasn’t safe to invest in a business enterprise. Private investment remained at historically low levels throughout the New Deal era.

FDR also made it more expensive for employers to hire people. FDR’s Social Security Act imposed excise taxes on employers. Total payroll and excise taxes on individual compensation also made it more expensive for employers to hire people. This led employers to operate their businesses with as few people as possible.

FDR’s National Labor Relations Act promoted compulsory unionization of mass production industries that led to an 11% increase in hiring costs in 1937 alone, leading to layoffs.

FDR destroyed food when millions were going hungry. In an effort to raise farm prices, New Dealers paid farmers to plow over 10 million acres of crops and destroyed 6 million farm animals. Farmers were paid not to grow anything on a portion of their property. This benefited them while leaving poor tenant farmers being paid nothing. The main losers of the Agricultural Adjustment Act, however, were the 100 million American consumers who were forced to pay more for food at a time when many of these consumers didn’t have much money.

FDR made everything more expensive. During the Great Depression Americans needed bargains, but FDR’s National Industrial Recovery Act (NRA) forced consumers to pay above market prices for goods and services. Moreover, FDR banned discounting by signing the Anti-Chain Store Act of 1936 and the Retail Price Maintenance Act of 1937. People were actually jailed for cutting prices and offering people bargains.

The Schechter brothers, Orthodox Jews in Brooklyn who ran a small chicken farm, were prosecuted and jailed by the federal government for selling their chickens at a price lower than had been set by NRA bureaucrats in Washington. (Their case went all the way to the Supreme Court,³ where they won.) The NRA tossed dry cleaner Jacob Maged into prison for pressing suits at 35 cents instead of the NRA mandated 40 cents.⁴

The Tennessee Valley Authority: The Government’s Monopoly

During the Great Depression, public works projects, flood control, and other such big government projects became a drag on the economy. An example of this was the Tennessee Valley Authority (TVA). FDR taxed the 98% of Americans who did not live in the Tennessee Valley and used this revenue to establish TVA power-generating projects that were exempt from federal and state taxes and regulations. Although the aim of the TVA was to electrify farms, electricity usage grew faster in the non-TVA southern states because income was the most important factor affecting electricity consumption. One of the reasons the Tennessee farmers were poor was that they had few tools. The tools that would have benefited them the most were things like tractors—and the diesel fuel and gasoline to power them—not electricity. TVA electricity could not transform the lives of these poor farmers and ironically, TVA electricity, although subsidized, was no bargain. Oil and natural gas were cheaper for home heating. The TVA was a program that demonstrated how public ownership meant the destruction of private capital.

William Chandler of Battelle’s Advanced International Studies Unit explained that the TVA’s Morris Dam and Wheeler Dam were billed as “jobs programs” and, much like today’s jobs programs the government promotes, were of dubious value. After they were built, the dams didn’t pay back the original investment for over 40 years. It has also been claimed that the TVA promoted flood control, but that’s considering only land downstream of the dams. TVA actually flooded more land behind the dams than it saved downstream. For example, the TVA flooded some 243,000 acres of land mostly belonging to poor farmers in order to protect the 8,700 acres of industrial and other property in Chattanooga, where people were considerably better off than the farmers whose land had been flooded. Also, thousands of sharecroppers were dispossessed of their land and received no compensation from the TVA.

The WPA: A Political Boondoggle?

FDR also channeled WPA (Works Progress Administration) spending and loan programs away from the poorest people who lived in the South and toward political swing states in the West and the East, where incomes were at least 60% higher than in the South. (This same type of behavior has been exposed in the current administration’s “stimulus programs.”)

Just like today’s “shovel-ready” programs, the jobs created by the NRA big government were only transitory and destroyed permanent jobs by taxing the private sector. Many of the “jobs” created by FDR weren’t really jobs—they were places where people could just show up and get paid; sometimes they didn’t even show up. A song recorded by Louis Armstrong in 1940 summed it up well:

Now don’t be a fool; working hard is passé

You’ll stand from five to six hours a day

Sit down and joke while you smoke; it’s okay

The W.P.A.

I’m so tired, I don’t know what to do

Can’t get fired, so I’ll take my rest until my work

Is through

The W.P.A.

What was so tragic about the New Deal was that during the second quarter of 1933, soon after the banks were reopened and the economy started to recover, durable and non-durable goods production was way up. Marquette University Economist Gene Smiley concluded that if the economy had continued to recover as it started to in the second quarter of 1933, unemployment would have been under 5% by October 1934. However, in the summer of 1933, the economy went into a relapse—a consequence of some of the “Hundred Days” legislation. (Factory unemployment hovered at about 35% by July of 1933.)

It was only after the Supreme Court struck down the NRA did a recovery begin. It continued for two years until 1937, when the consequences of what was known as the “Second New Deal” laws became apparent—namely the Social Security Act excise taxes on payrolls, the Undistributed Profits Tax, and the Wagner Act that the promoted unionization of mass production industries and led to the big wage increases in 1937.

Those things, together with moves by the Federal Reserve which had been centralized by FDR under the Banking Act of 1935, led to the depression of 1938, knocking the U.S. economy back into the doldrums.

Stanford University political historian David M. Kennedy, a known admirer of FDR, wrote in Freedom from Fear about FDR’s “conspicuous failure to produce economic recovery.” Kennedy wrote that Roosevelt stood before the world in 1938 as a “badly weakened leader unable to cure his own country’s apparently endless economic crisis” in the ninth year of the Great Depression and, after six years of Roosevelt’s New Deal with more than 10 million workers still unemployed, America still had not found a formula for economic recovery.

Lesson Learned?

A principal lesson from the failure of the New Deal is that government will best promote prosperity by letting people keep more of their money, removing obstacles to productive enterprise, making it easier for employers to hire people, providing stable money, and cultivating a political climate where people feel it’s safe to invest for the future.

The Founding Fathers knew Who would be responsible if their new nation was to survive. The Holy Bible, especially the book of Deuteronomy, was the source for 34% of all quotations cited by our Founding Fathers.

If this nation is to continue to survive, we have to turn away from man-made government as the source of our strength and turn to the God of the Bible who is our true hope and strength.