The Great Depression; H. Sennholz

204 order built on unhampered mar kets, unbridled competition, specu lation, property rights, and the profit motive. According to them, the Great Depression proved the inevitability of a new order built on government intervention, polit ical and bureaucratic control, hu man rights, and government wel fare. Such persons, under the in fluence of Keynes, blame business men for precipitating depressions by their selfish refusal to spend enough money to maintain or im prove the people's purchasing power. This is why they advocate vast governmental expenditures and deficit spending - resulting in an age of money inflation and credit expansion. Classical economists learned a different lesson. In their view, the Great Depression consisted of four 1975 THE GREAT DEPRESSION 205 consecutive depressions rolled into one. The causes of each phase dif fered, but the consequences vvere all the same: business stagnation and unemployment.

The Business Cycle The first phase was a period of boom and bust, like the business cycles that had plagued the Amer ican economy in 1819-20, 1839-43, 1857-60, 1873-78, 1893-97, and 1920-21. In each case, government had generated a boom through easy money and credit, which was soon follovved by the· inevitable bust. The spectacular crash of 1929 followed five years of reckless credit expansion by the Federal Reserve System under the Cool idge Administration. In 1924, after a sharp decline in business, the Reserve banks suddenly cre ated some $500 million in new credit, vvhich led to a bank credit expansion of over $4 billion in less than one year. While the im media te effects of this new power ful expansion of the nation's money and credit were seemingly beneficial, initiating a new eco nomic boom and effacing the 1924 decline, the ultimate outcome was most disastrous. It vvas the begin ning of a monetary policy that led to the stock market crash in 1929 and the follovving depression. In fact, the expansion of Federal Reserve credit in 1924 constituted what Benjamin Anderson in his great treatise on recent economic history (Economics and the Pub lic Welfare, D. Van Nostrand, 1949) called "the beginning of the New Deal."

The Federal Reserve credit ex pansion in 1924 also was designed to assist the Bank of England in its professed desire to maintain prewar exchange rates. The strong U.S. dollar and the weak British pound were to be readjusted to prewar conditions through a policy of inflation in the U.S. and de flation in Great Britain. The Federal Reserve System launched a further burst of infla tion in 1927, the result being that total currency outside banks plus demand and time deposits in the United States increased from $44.51 billion at the end of June, 1924, to $55.17 billion in 1929. The volume of farm and urban mortgages expanded from $16.8 billion in 1921 to $27.1 billion in 1929. Similar increases occurred in industrial, financial, and state and local government indebted ness. This expansion of money and credit was accompanied by rapidly rising real estate and stock prices. Prices for industrial securities, according to Standard & Poor's common stock index, rose from 59.4 in June of 1922 to 195.2 in September of 1929. Railroad stock 206 THE FREEMAN April climbed from 189~2 to 446.0, while public utilities rose from 82.0 to 375.1.

A Series of False Signals The vast money and credit ex pansion by the Coolidge Admin istration made 1929 inevitable. In flation and credit expansion always precipitate business maladjust ments and malinvestments that must later be liquidated. Tne ex pansion artificially reduces and thus falsifies interest rates, and thereby misguides businessmen in their investment decisions. In the belief that declining rates indi cate growing supplies of capital savings, they embark upon new production projects. The creation of money gives rise to an economic boom. It causes prices to rise, es pecially prices of capital goods used for business expansion. But these prices constitute business costs. They soar until business is no longer profitable, at which time the decline begins. In order to pro long the boom, the monetary au thorities may continue to inject new money until finally frightened by the prospects of a runaway in flation. The boom that was built on the quicksand of inflation then comes to a sudden end.

The ensuing recession is a period of repair and readjustment. Prices and costs adj ust anew to consumer choices and preferences. And above all, interest rates read just to reflect once more the actual supply of and demand for genuine savings. Poor business invest ments are abandoned or written down. Business costs, especially labor costs, are reduced through greater labor productivity and managerial efficiency, until busi ness can once more be profitably conducted, capital investments earn interest, and the market econ omy function smoothly again. After an abortive attempt at stabilization in the first half of 1928, the Federal Reserve System finally abandoned its easy money policy at the beginning of 1929. It sold government securities and thereby halted the bank credit ex pansion. It raised its discount rate to 6 per cent in August, 1929. Time-money rates rose to 8 per cent, commercial paper rates to 6 per cent, and call rates to the panic figures of 15 per cent and 20 per cent. The American economy was beginning to readj ust. In June, 1929, business activity began to recede. Commodity prices began their retreat in July.

The security market reached its high on September 19 and then, under the pressure of early selling, slowly began to decline. For five more weeks the public nevertheless bought heavily on the way down. More than 100 million -shares were traded at the New York Stock Ex1975 T'HE GREAT DEPRESSION 207 change in September. Finally it dawned upon more and more stockholders that the trend had changed. Beginning with October 24, 1929, thousands stampeded to sell their holdings immediately and at any price. Avalanches of selling by the public swamped the ticker tape. Prices broke spectacu larly. Liquidation and Adjustment The stock market break sig naled the beginning of a readj ust ment long overdue. It should have been an orderly liquidation and adjustment followed by a normal revi val. After all, the financial structure of business was very strong. Fixed costs were low as business had refunded a -good many bond issues and had reduced debts to banks with the proceeds of the sale of stock. In the follow ing months, most business earn ings made a reasonable showing.

Unemployment in 1930 averaged under 4 million, or 7.8 per cent of labor force. In modern terminology, the American economy of 1930 had fallen into a mild recession. In the absence of any new causes for de pression, the following year should have brought recovery as in pre vious depressions. In 1921-22 the American economy recovered fully in less than a year. What, then, precipitated the abysmal collapse after 1929? What prevented the price and cost adj ustments and th us led to the second phase of the Great Depression? Disintegration of the World Economy The Hoover Administration op posed any readjustment. Under the influence of "the new econom ics" of government planning, the President urged businessmen not to cut prices and reduce wages, but rather to incre.ase capital out lay, wages, and other spending in order to maintain purchasing power. He embarked upon deficit spending and called upon munici palities to increase their borrow ing for more public works.

Through the Farm Board which Hoover had organized in the au tumn of 1929, the Federal govern ment tried strenuously to uphold the prices of wheat, cotton, and other farm products. The GOP tradition was further invoked to curtail foreign imports. The Hawley-Smoot Tariff Act of June, 1930, raised Americ~n tariffs to unprecedented levels, which practically closed our borders to foreign goods. According to most economic historians, this was the -crowning folly of the whole period from 1920 to 1933 and the begin ning of the real depression. "Once we raised our tariffs," wrote Ben jamin Anderson, "an irresistible movement all over the world to 208 THE FREEMAN April raise tariffs and to erect other trade barriers, including quotas, began. Protectionism ran wild over the world. Markets were cut off. Trade lines were narrowed. Unemployment in the export in dustries all over the world grew with great rapidity. Farm prices in the United States dropped sharply through the whole of 1930, but the most rapid rate of decline came following the passage of the tariff bilL" When President Hoover announced he would sign the bill into law, industrial stocks broke 20 points in one day. The stock market correctly anticipated the depression.

The protectionists have never learned that curtailment of im ports inevitably hampers exports. Even if foreign countries do not immediately retaliate for trade re strictions injuring them, their for eign purchases are circumscribed by their ability to sell abroad. This is why the Hawley-Smoot Tariff Act which clos~d our borders to foreign products also closed for eign markets to our products. American exports fell from $5.5 billion in 1929 to $1.7 billion in 1932. American agriculture cus tomarily had exported over 20 per cent of its wheat, 55 per cent of its cotton, 40 per cent of its to bacco and lard, and many other products. When international trade and commerce were disrupted, American farming collapsed. In fact, the rapidly growing trade restrictions, including tariffs, quotas, foreign exchange controls, and other devices were generating a worldwide depression. Agricultural commodity prices, which had been well above the 1926 base before the crISIS, dropped to a low of 47 in the sum mer of 1932. Such prices as $2.50 a hundredweight for hogs, $3.28 for beef cattle, and 32¢ a bushel for wheat, plunged hundreds of thousands of farmers into bank ruptcy. Farm mortgages were foreclosed until various states passed moratoria laws, thus shift ing the bankruptcy to countless creditors.

Rural Banks in Trouble The main creditors of Amerfcan farmers were, of course, the rural banks. When agriculture collapsed, the banks closed their doors. Some 2,000 banks, with deposit liabili ties of over $1.5 billion, suspended between August, 1931, and Febru ary, 1932. Those banks that re mained open were forced to cur tail their operations sharply. They liquidated customers' loans on securities, contracted real estate loans, pressed for the payment of old loans, and refused to make new ones. Finally, they dumped their most marketable bond hold ings on an already depressed 197/5 THE GREAT DEPRESSION 209 market. The panic that had en gulfed American agriculture also gripped the banking system and its millions of customers. The American banking crisis wa~ aggravated by a series of events involving Europe. When the world economy began to disin tegrate and economic nationalism ran rampant, European debtor countries were cast in precarious payment situations. Austria and Germany ceased to make foreign payments and froze large English and American credits; when Eng land finally suspended gold pay ments in September, 1931, the crisis spread to the U.S. The fall in foreign bond values set off a collapse of the general bond market, which hit American banks at their weakest point - their in vestment portfolios.

Depression Compounded 1931 was a tragic year. The whole nation, in fact, the whole world, fell into the cataclysm of despair and depression. American unemployment jumped to more than 8 million and continued to rise. The Hoover Administration, summarily rejecting the thought that it had caused the disaster, labored diligently to place the blame on American businessmen and speculators. President Hoover called together the nation's in dustrial leaders and pledged them to adopt his program to rnaintain wage rates and expand construc tion. He sent a telegram to all the governors, urging cooperative ex pansion of all public works pro grams. He expanded Federal pub lic works and granted subsidies to ship construction. And for the benefit of the suffering farmers, a host of Federal agencies embarked upon price stabilization policies that generated ever larger crops and surpluses which in turn de pressed product prices even fur ther. Economic conditions went from bad to worse and unemploy ment in 1932 averaged 12.4 mil lion.

In this dark hour of human want and suffering, the Federal government struck a final blow. The Revenue Act of 1932 doubled the income tax, the sharpest in crease in the Federal tax burden in American history. Exemptions were lowered, "earned income credit" was eliminated. Normal tax rates were raised from a range of 11/ 2 to 5 per cent to a range of 4 to 8 per cent, surtax rates from 20 per cent to a maximum of 55 per cent. Corporation tax rates were boosted from 12 per cent to 133A, and 141j2 per cent. Estate taxes were raised. Gift taxes were imposed with rates from 3A, to 331j2 per cent. A 1¢ gasoline tax was imposed, a 3 per cent automo bile tax, a telegraph and telephone 210 THE FREEMAN April tax, a 2 ¢ check tax, and many other excise taxes. And finally, postal rates were increased sub stantially. When state and local govern ments faced shrinking revenues, they, too, joined the Federal gov ernment in imposing new levies.

The rate schedules of existing taxes on income and business were increased and new taxes imposed on business income, property, sales, tobacco, liquor, and other products. Murray Rothbard, in his author itative work on America's Great Depression (Van Nostrand, 1963), estimates that the fiscal burden of Federal, state, and local govern ments nearly doubled during the period, rising from 16 per cent of net private product to 29 per cent. This blow, alone, would bring any economy to its knees, and shatters the silly contention that the Great Depression was a consequence of economic freedom. The New Deal of NRA and AAA One of the great attributes of the private-property market sys tem is its inherent ability to over come almost any obstacle. Through price and cost readj ustment, man agerial efficiency and labor pro ductivity, new savings and invest ments, the market economy tends to regain its equilibrium and re sume its service to consumers. It doubtless would have recovered in short order from the lIoover in terventions had there been no fur ther tampering.

lIowever, when President Franklin Delano Roosevelt as sumed the Presidency, he, too, fought the economy all the way. In his first 100 days, he swung hard at the profit order ..Instead of clearing away the prosperity bar riers erected by his predecessor, he built new ones of his own. lIe struck in every known way at the integrity of the U.S. dollar through quantitative increases and qualitative deterioration. lIe seized the people's gold holdings and subsequently devalued the dollar by 40 per cent. With some third of industrial workers unemployed, President Roosevelt embarked upon sweep ing industrial reorganization. He persuaded Congress to pass the National Industrial Recovery Act (NIRA), which set up the National Recovery Administration (NRA). Its purpose was to get business to regulate itself, ignor ing the antitrust laws and develop ing fair codes of prices, wages, hours, and working conditions.

The President's· Re-employment Agreelnent called for a minimum wage of 40¢ an hour ($12 to $15 a week in smaller communities), a 35-hour work week for industrial workers and 40 hours for white 1975 THE GREAT DEPRESSION 211 collar workers, and a ban on all youth labor. This was a naive attempt at "in creasing purchasing power" by in creasing payrolls. But, the im mense increase in business costs through shorter hours and higher wage rates worked naturally as an antirevival measure. After passage of the Act, unemployment rose to nearly 13 million. The South, especially, suffered severely from the minimum wage provi sions. The Act forced 500,000 Negroes out of work. Nor did President Roosevelt ignore the disaster that had be fallen American agriculture. He attacked the problem by passage of the Farm Relief and Inflation Act, popularly known as the First Agricultural Adjustment Act. The objective was to raise farm in come by cutting the acreages planted or destroying the crops in the field, paying the farmers not to plant anything, and organizing marketing agreements to improve distribution. The program soon covered not only cotton, but also all basic cereal and meat produc tion as well as principal cash crops. The expenses of the pro gram were to be covered by a new "processing tax" levied on an al ready depressed industry.

NRA codes and AAA processing taxes came in July and August of 1933. Again, economic production which had flurried briefly before the deadlines, sharply turned downward. The Federal Reserve index dropped from 100 in July to 72 in November of 1933. Pump-Priming Measu.res When the economic planners saw their plans go wrong, they simply prescribed additional doses of Fed eral pump priming. In his Jan\lary 1934 Budget Message, Mr. Roose velt promised expenditures of $10 billion while revenues were at $3 billion. Yet, the economy failed to revive; the business index rose to 86 in May of 1934, and then turned down again to 71 by Sep tember. Furthermore, the spend ing program caused a panic in the bond market which cast new doubts on American money and banking. Revenue legislation in 1933 sharply raised income tax rates in the higher brackets and im posed a 5 per cent withholding tax on corporate dividends. Tax rates were raised again in 1934.

Federal estate taxes were brought to the highest levels in the world. In 1935, Federal estate and in come taxes were raised once more, although the additional revenue yield was insignificant. The rates seemed clearly aimed at the redis tribution of wealth. According to Benjamin Ander son, "the impact of all these multi212 THE FREEMAN April tudinous measures - industrial, agricultural, financial, monetary and other - upon a bewildered in dustrial and financial community was extraordinarily heavy. We must add the effect of continuing disquieting utterances by the President. He had castigated the bankers in his inaugural speech. He had made a slurring compari son of British and American bank ers in a speech in the summer of 1934.... That private enterprise could survive and rally in the midst of so great a disorder is an amazing demonstration of the vi tality of private enterprise."

Then came relief from unex pected quatters. The "nine old men" of the Supreme Court, by unanimous decision, outlawed NRA in 1935 and AAA in 1936. The Court maintained that the Federal legislative power had been unconstitutionally delegated and states' rights violated. These two decisions removed some fearful handicaps under which the economy was laboring. NRA, in particular, was a night mare with continuously changing rules and regulations by a host of government bureaus. Above all, voidance of the act immediately reduced labor costs and raised productivity as it permitted labor markets to adjust. The death of AAA reduced the tax burden of agriculture and halted the shocking destruction of crops. Unem ployment began to decline. In 1935 it dropped to 9.5 million, or 18.4 per cent of the labor force, and in 1936 to only 7.6 million, or 14.5 per cent. A New Deal for Labor The third phase of the Great Depression was thus drawing to a close. But there was little time to rej oice, for the scene was being set for another collapse in 1937 and a lingering depression that lasted until the day of Pearl Har bor. More than 10 million Ameri cans were unemployed in 1938, and more than 9 million in 1939.

The relief granted by the Su preme Court was merely tempo rary. The Washington planners could not leave the economy alone; they had to earn the support of organized labor, which was vital for re-election. The Wagner Act of July 5, 1935, earned the lasting gratitude of labor. This law revolutionized American labor relations. It took labor disputes out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board fur ther perverted the law that al ready afforded legal immunities and privileges to labor unions. The 1975 THE GREAT DEPRESSION 213 U. S. thereby abandoned a great achievement of Western civiliza tion, equality under the law. The Wagner Act, or National Labor Relations Act, was passed in reaction to the Supreme Court's voidence of NRA and its labor codes. It aimed at crushing all em ployer resistance to labor unions.

Anything an employer might do in self-defense became an "unfair labor practice" punishable by the Board. The law not only obliged employers to deal and bargain with the unions designated as the employees' representative; later Board decisions also made it un lawful to resist the demands of labor union leaders. Following the election of 1936, the labor unions began to make ample use of their new powers. Through threats, boycotts, strikes, seizures of plants, and outright violence committed in legal sanc tity, they forced millions of work ers into membership. Conse quently, labor productivity de clined and wages were forced up ward. Labor strife and disturb ance ran wild. Ugly sitdown strikes idled hundreds of plants. In the ensuing months economic activity began to decline and un employment again rose above the ten million mark. But the Wagner Act was not the only source of crisis in 1937.

President Roosevelt's shocking attempt at packing the Supreme Court, had it been successful, would have subordinated the Judi ciary to the Executive. In the U.S. Congress the President's power was unchallenged. Heavy Demo cratic majorities in both houses, perplexed and frightened by the Great Depression, blindly followed their leader. But when the Presi dent strove to assume control over the Judiciary, the American na tion rallied against him, and he lost his first political fight in the halls of Congress. There was also his attempt at controlling the stock market through an ever-increasing num ber of regulations and investiga tions by the Securities and Ex change Commission. "Insider" trading was barred, high and in flexible margin requirements im posed and short selling restricted, mainly to prevent repetition of the 1929 stock market crash. Never-: theless the market fell nearly 50 per cent from August of 1937 to March of 1938. The American economy again underwent dread ful punishment.

Other Taxes and Controls Yet other factors contributed to this new and fastest slump in U.S. history. The Undistributed Profits Tax of 1936 struck a heavy blow at profits retained for use in busi ness. Not content with destroying 214 THE FREEMAN April the wealth of the rich through'" confiscatory income and estate tax ation, the administration meant to force the distribution of corporate savings as dividends subject to the high income tax rates. Though the top rate finally imposed on undis tributed profits was "only" 27 per cent, the new tax succeeded in diverting corporate savings from employment and production to dividend income. Amidst the new stagnation and unemployment, the President and Congress adopted yet another dan gerous piece of New Deal legisla tion: the Wages and Hours Act or Fair Labor Standards Act of 1938. The law raised minimum wages and reduced the work week in stages to 44, 42, and 40 hours. It provided for time-and-a-half pay for all work over 40 hours per week and regulated other labor conditions. Again, the Federal government thus reduced labor productivity and increased labor costs - ample grounds for further depression and unemployment.

Throughout this period, the Fed eral government, through its monetary arm, the Federal Re serve System, endeavored to rein flate the economy. Monetary ex pansion from 1934 to 1941 reached astonishing proportions. The monetary gold of Europe sought refuge from the gathering clouds of political upheaval, boosting American bank reserves to unac customed levels. Reserve balances rose from $2.9 billion in January, 1934, to $14.4 billion in January of 1941. And with this growth of member bank reserves, interest rates declined to fantastically low levels. Commercial paper often yielded less than 1 per cent, bank ers' acceptances from l/8 per cent to 14, per cent. Treasury bill rates fell to 1/10 of 1 per cent and Treas ury bonds to some 2 per cent. Call loans were pegged at 1 per cent and prime customers' loans at 1l/2 per cent. The money market was flooded and interest rates could hardly go lower.

Deep-Rooted Causes The American economy simply could not recover from these suc cessive onslaughts by first the Re publican and then the Democra tic Administrations. Individual enterprise, the mainspring of un precedented income and wealth, didn't have a chance. The calamity of the Great De pression finally gave way to the holocaust of World War II. When nlore than 10 million able-bodied men had been drafted into the armed services, unemployment ceased to be an economic problem. And when the purchasing power of the dollar had been cut in half through vast budget deficits and currency inflation, American busi1975 THE GREAT DEPRESSION 215 ness managed to adj ust to the oppressive costs of the HOQver Roosevelt Deals. The radical infla tion in fact reduced the real costs of labor and thus generated new employment in the postwar period. Nothing woul~ be more foolish than to single out the men who led us in those baleful years and condemn them for all the evil that befell us. The ultimate roots of the Great Depression were growing in the hearts and minds of the American people. It is true, they abhored the painful symptoms of the great dilemma. But the large majority favored and voted for the very policies that made the disaster inevitable: inflation and credit expansion, protective tariffs, labor laws that raised wages and farm laws that raised prices, ever higher taxes on the rich and dis tribution of their wealth. The seeds for the Great Depression were sown by scholars and teach ers during the 1920's and earlier when social and economic ideol ogies that were hostile toward our traditional order of private prop erty and individual enterprise con quered our colleges and universi ties. The' professors of earlier years were as guilty as the poli tical leaders of the 1930's.

Social and economic decline is facilitated by moral decay. Surely, the Great Depression would be in conceivable without the growth of covetousness and envy of great personal wealth and income, the mounting desire for public assist ance and favors. It would be in conceivable without an ominous decline of individual independence and self-reliance, and above all, the burning desire to be free from man's bondage and to be responsi ble to God alone. Can it happen again? Inexor able economic law ascertains that it must happen again whenever we repeat the dreadful errors that generated the Great Depression. @f) Editor's Note: The foregoing review, of the monetary manipula tions and other interventions that led to the crash of 1929 and prolonged it for a decade, first appeared in the October 1969 FREEMAN. It also has been widely distributed as a Bramble Minibook. The lesson, however, remains to be learned. A depres sion has a message, if we will heed it.