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Mackinac Center for Public Policy | Great Myths of the Great Depression 1

Great
Myths

of the
Great

Depression

“HERBERT HOOVER
believed government should play

no role in the economy.”

“GOVERNMENT PROGRAMS
helped lower unemployment by

putting many Americans to work.”

“FRANKLIN ROOSEVELT’S
‘New Deal’ saved America from the
fai lure of free-market capital ism.”

This edit ion is a joint project of the Mackinac Center for Public Policy
and the Foundation for Economic Education

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FOUNDATION FOR ECONOMIC EDUCATION

30 South Broadway, Irvington-on-Hudson, NY 10533 • (914)591-7230 • www.fee.org

Page 2

Mackinac Center for Public Policy | Great Myths of the Great Depression 2

Great Myths of the Great Depression by Lawrence W. Reed. Original edition printed in 1981.
This edition was printed in 2008 — during the 20-year anniversary of the Mackinac Center for Public Policy —

as a joint project of the Mackinac Center and the Foundation for Economic Education.

To JaMes M. Rodney
a great friend of truth, character and liberty

Page 12

Mackinac Center for Public Policy | Great Myths of the Great Depression 10

In his diary, Morgenthau wrote,
“If anybody ever knew how
we really set the gold price
through a combination of lucky
numbers, I think they would
be frightened.”21 Roosevelt also
single-handedly torpedoed the
London Economic Conference
in 1933, which was convened
at the request of other major
nations to bring down tariff rates
and restore the gold standard.

Washington and its reckless
central bank had already made
mincemeat of the gold standard
by the early 1930s. Roosevelt’s
rejection of it removed most of
the remaining impediments to
limitless currency and credit
expansion, for which the nation
would pay a high price in later
years in the form of a depreciating
currency. Sen. Carter Glass put it
well when he warned Roosevelt
in early 1933: “It’s dishonor, sir.
This great government, strong in
gold, is breaking its promises to
pay gold to widows and orphans
to whom it has sold government
bonds with a pledge to pay gold
coin of the present standard of
value. It is breaking its promise to
redeem its paper money in gold
coin of the present standard of
value. It’s dishonor, sir.”22

Though he seized the country’s
gold, Roosevelt did return
booze to America’s bars and
parlor rooms. On his second
Sunday in the White House, he
remarked at dinner, “I think this
would be a good time for beer.”23
That same night, he drafted a
message asking Congress to end

Prohibition. The House approved
a repeal measure on Tuesday, the
Senate passed it on Thursday and
before the year was out, enough
states had ratified it so that the
21st Amendment became part of
the Constitution. One observer,
commenting on this remarkable
turn of events, noted that of two
men walking down the street at
the start of 1933 — one with a
gold coin in his pocket and the
other with a bottle of whiskey in
his coat — the man with the coin
would be an upstanding citizen
and the man with the whiskey
would be the outlaw. A year later,
precisely the reverse was true.

In the first year of the New Deal,
Roosevelt proposed spending $10
billion while revenues were only
$3 billion. Between 1933 and 1936,
government expenditures rose by
more than 83 percent. Federal debt
skyrocketed by 73 percent.

FDR talked Congress into
creating Social Security in 1935

and imposing the nation’s first
comprehensive minimum wage
law in 1938. While to this day
he gets a great deal of credit for
these two measures from the
general public, many economists
have a different perspective. The
minimum wage law prices many of
the inexperienced, the young, the
unskilled and the disadvantaged
out of the labor market. (For
example, the minimum wage
provisions passed as part of
another act in 1933 threw an
estimated 500,000 blacks out
of work).24 And current studies
and estimates reveal that Social
Security has become such a long-
term actuarial nightmare that it
will either have to be privatized or
the already high taxes needed to
keep it afloat will have to be raised
to the stratosphere.

Roosevelt secured passage of
the Agricultural Adjustment
Act, which levied a new tax
on agricultural processors and
used the revenue to supervise
the wholesale destruction
of valuable crops and cattle.
Federal agents oversaw the ugly
spectacle of perfectly good fields
of cotton, wheat and corn being
plowed under (the mules had
to be convinced to trample the
crops; they had been trained, of
course, to walk between the rows).
Healthy cattle, sheep and pigs were
slaughtered and buried in mass
graves. Secretary of Agriculture
Henry Wallace personally gave
the order to slaughter 6 million
baby pigs before they grew to
full size. The administration also
paid farmers for the first time

MICHIGAN SENATOR Arthur Vandenberg
argued that a sound economy could not be
restored through FDR’s punitive tax and
regulatory measures.

Page 13

Mackinac Center for Public Policy | Great Myths of the Great Depression 11

for not working at all. Even if
the AAA had helped farmers by
curtailing supplies and raising
prices, it could have done so only
by hurting millions of others who
had to pay those prices or make do
with less to eat.

Blue eAGles, red ducks

Perhaps the most radical aspect
of the New Deal was the National
Industrial Recovery Act, passed
in June 1933, which created
a massive new bureaucracy
called the National Recovery
Administration. Under the NRA,
most manufacturing industries
were suddenly forced into
government-mandated cartels.
Codes that regulated prices and
terms of sale briefly transformed
much of the American economy
into a fascist-style arrangement,
while the NRA was financed by
new taxes on the very industries
it controlled. Some economists
have estimated that the NRA
boosted the cost of doing business
by an average of 40 percent — not
something a depressed economy
needed for recovery.

The economic impact of the NRA
was immediate and powerful.
In the five months leading up
to the act’s passage, signs of
recovery were evident: factory
employment and payrolls had
increased by 23 and 35 percent,
respectively. Then came the NRA,
shortening hours of work, raising
wages arbitrarily and imposing
other new costs on enterprise.
In the six months after the law
took effect, industrial production

dropped 25 percent. Benjamin
M. Anderson writes, “NRA was
not a revival measure. It was an
antirevival measure. ... Through
the whole of the NRA period
industrial production did not
rise as high as it had been in July
1933, before NRA came in.”25

The man Roosevelt picked
to direct the NRA effort was
General Hugh “Iron Pants”
Johnson, a profane, red-faced
bully and professed admirer of
Italian dictator Benito Mussolini.
Thundered Johnson, “May
Almighty God have mercy on
anyone who attempts to interfere
with the Blue Eagle” (the official
symbol of the NRA, which one
senator derisively referred to as
the “Soviet duck”). Those who
refused to comply with the NRA
Johnson personally threatened
with public boycotts and “a
punch in the nose.”

There were ultimately more than
500 NRA codes, “ranging from
the production of lightning rods

to the manufacture of corsets
and brassieres, covering more
than 2 million employers and
22 million workers.”26 There
were codes for the production
of hair tonic, dog leashes, and
even musical comedies. A New
Jersey tailor named Jack Magid
was arrested and sent to jail for
the “crime” of pressing a suit
of clothes for 35 cents rather
than the NRA-inspired “Tailor’s
Code” of 40 cents.

In “The Roosevelt Myth”, historian
John T. Flynn described how
the NRA’s partisans sometimes
conducted “business”:

The NRA was discovering
it could not enforce its
rules. Black markets grew
up. Only the most violent
police methods could procure
enforcement . In Sidney
Hillman’s garment industry
the code authority employed
enforcement police. They
roamed through the garment
district like storm troopers.

AT THE NADIR of the Great Depression, half of American industrial production was idle as the
economy reeled under the weight of endless and destructive policies from both Republicans
and Democrats in Washington.

Page 23

Mackinac Center for Public Policy | Great Myths of the Great Depression 21

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Celebrating 60 Years of FEE

and 50 Years of The Freeman!

The Greenspan Fed in Perspective
by Roger W. Garrison

Belt and Braces in
the Labor Market
by Anthony de Jasay

Institutions and
Development:
The Case of China
by James A. Dorn

To receive a complimentary year (10 issues)
of The Freeman, please e-mail: [email protected]

Foundation for Economic Education
30 South Broadway
Irvington-on-Hudson, NY 10533
(800) 960-4333
www.fee.org

“The Foundation for Economic Education kept
the quality of The Freeman high and made it an
effective teacher of basic principles to a broad
and receptive clientele.”

—Milton Friedman
Nobel Laureate

“I read every issue of The Freeman. Even though
I read tons of political publications, I am amazed
that The Freeman always has an article or two
that gives me new insight.”

—John Stossel
ABC News’ 20/20

Page 24

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About the Mackinac center for public policy

About the Foundation for economic education

Freedom’s Home Since 1946

FOUNDATION FOR ECONOMIC EDUCATION

30 South Broadway, Irvington-on-Hudson, NY 10533 • (914)591-7230 • www.fee.org

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