Franklin Roosevelt was given credit for governing during the Great Depression years. For decades, FDR’s New Deal was believed by many economists to have prevented the total collapse of the United States economy until markets and industry could recover with the production machinery to supply the US and its allies with war material to fight the Axis powers.
A more recent study of FDR’s programs revealed that the opposite was true. In FDR Stupidly Jim Powell shows that many of Roosevelt’s New Deal programs hurt the economy far more than they helped the recovery. Higher taxes, strict regulation and a centralized financial system all combined to keep unemployment high and the economy stagnant throughout the 1930s.
The recession that became the Great Depression had its roots in Federal Reserve. In 1928 and 1929, H raised interest-rates and caused a severe monetary contraction. Powell estimates that the money supply has actually decreased by 1/3 (chapter 2).
Powell also notes that many states had banking laws that prohibited them from owning banks. This variety also hindered the weaker banks. About 10,000 US banks failed between 1929 and 1933. In Canada, where there were no restrictions on bank branches, there were no bank failures. Most of the failed banks were single-office rural banks (chapter 4).
Herbert Hoover, who was president when the stock market crashed in 1929, took steps to save the economy, many of which are similar to the steps taken by Congress and President Barack Obama in recent years (chapter 3). Hoover encouraged industry to keep wages high despite falling sales and demand. He tried to bring people back to public works projects and signed the Davis-Bacon Act, which required local governments to pay union wages, which helped keep labor costs artificially high. It also strengthened subsidies, which led to lower production and prices.
In addition, Hoover signed the Smoot-Hawley Tariff in 1930, which raised the price of imported goods. It has been given to many other countries by raising prices on American goods. The Tax Act 1932 also raised taxes. Other Hoover policies included restrictions on short sales and amendments to bankruptcy law that limited the rights of creditors. Hoover’s responses and Roosevelt’s adoption of many of his policies turned the recession into the Great Depression.
When FDR became president in 1933, he initiated a series of policies called the New Deal. The Hoover administration took many of the policies made by FDR and expanded upon them. One of FDR’s first actions was to declare a series of bank holidays, in which banks were ordered to close. Powell argues that bank holidays actually contributed to the bank run. It is known that the banks were going to be closed. They also knew, in the days before credit, that they needed money. The answer was to rush to the bank and withdraw the money when it was open and paying.
Another of FDR’s first actions was signing the Glass-Steagall Banking Act of 1933. This law (repealed in 1999) created a wall between investment banks and commercial banks. The FDIC is also set to protect bank deposits. The separation of banks prevented diversification and required many of the strongest banks in the country to be split into smaller – weaker units.
Deposit insurance has eased the minds of depositors, but Powell argues that people are also more risk-tolerant. If they knew their money was guaranteed by the government, they would care less about what they did with their bank deposits. Again they urged the banks to be more dangerous for the money of the depositors, because they knew that it was the defense of the republic.
FDR also raised taxes. The Income Tax Act of 1936 increased federal-income-tax”>federal income tax, dividends and estates, deduction limits Undivided profits Corporate tax raised from 1936 for business losses (chapter 6). the end of FDR’s tenure, top marginal were in personal and corporate incomes more than 90% (chapter 18). tax rates discouraged corporate investment and further slowed economic growth.
At the same time that feederal-tax-return”>feederal tax rates were rising, local and state revenues were increasing. states states have seen dramatic increases in their income taxes for individuals and businesses as well as higher sales taxes.
Congress actually passed legislation in 1939 that reversed the trend of higher taxes. The Income Tax Act of 1939 would have lowered corporate taxes to a flat 18% and eliminated undivided profits taxes. However, FDR refused to sign the bill into law.
Another big New Deal tax increase was passed into law as the Social Security Act of 1935 (chapter 13). When it first passed, Social Security payments set up a tax that would go into the Old Age Retirement Account. Benefits began to be received after January 1, 1942 (although this was later changed until 1940). This was meant to allow funds to be used to pay for building benefits, although the system became pay-as-you-go after FDR and the meeting from the trust fund in 1940.
Social Security’s recovery has slowed for many reasons. First, it is clearly exhausted the ability of employees to buy, since the tax has reduced the real pay to take home time. When the salary is already low. Since employers were also taxed, it made businesses more expensive and disorganized by adding employers. Finally, it removed money from circulation that could have been spent on goods and services, because tax receipts were held in trust for several years before they were paid out. The last legacy of Social Security is an unfunded fund that is expected to run out by 2037 [4].
When the US was on the gold standard in the 1930s, FDR introduced new policies to endlessly borrow and print money just like President Obama. If they see the swelling of the people, they can exchange their papers for gold. One way that avoided this problem was by amending Trading with the Enemy in 1917, effective in times of national need. Under the authority of this law, FDR issued an executive order (EO 6102) forcing the people to convert the government into only a minimum weight of gold. By seizing gold, FDR increased the price of gold from the free market price of $20 to $35 per ounce [2].
Another intervention in private contracts was the Wagner Act (chapter 14), which closed shops and established a ban on partnership ( in-house) syndicate. The Frazier Lemke Farm Bankruptcy Act of 1934 (chapter 15) limited the rights of creditors in an attempt to stem the tide of farm foreclosures. In The Supreme Court ruled in Occidente Hotel v. the government could impose limits on the freedom of contract, so that it could establish minimum laws. The attack on business was so intense that a 1941 Fortune magazine poll showed that 91% of respondents believed a dictatorship and the loss of many rights was imminent (pp. 86).
The New Deal also used massive public works projects to stop work. The Civilian Conservation Corps (CCC) and Administration (PWA) hired a large number of Americans for construction jobs. According to Powell (chapter 7), these organizations concentrated their efforts in the westernmost states where FDR stood to gain the most political power. It also shows that many of the government jobs have been created for skilled workers. Unskilled workers who would have had a harder time finding work were left behind. Additionally, government workers competition artificially maintained wages that would prevent the market from reaching an equilibrium in which workers could have. real jobs
Another upward force on wages came in the National Industrial Recovery Act of 1933 (Chapter 9). This law contained a host of centralized economic policy measures. The law set minimum wages and minimum prices and production quotas. The law also made it easier for workers to form a union.
The effect of the NIRA was to drive earnings above the market. Higher labor costs in a tight economy have led many businesses to become more automated, which means that cost control and control are costing many workers their jobs. Blacks were especially hurt because they were excluded from many unions at the time. If a company closed shop, where workers had to be union members, blacks were effectively barred from working.
Ultimately the NIRA was ruled by the Supreme Court [3]. The Supreme Court considered the NIRA as a legislative delegation to the president and industrial groups. The court also pointed out that while the constitution gives congress the power to regulate interstate commerce, it attempts to regulate the Nira codes. and intrastate ownership and local commerce alike.
There were other New Deal laws that attempted to fix prices and also reduce competition (chapter 17). The Robinson-Patman Act of 1936 prefigured the modern demonization of Wal-mart, making it illegal for large chains to give stores lower prices. small sellers. The Miller-Tydings Just Price Support Act of 1937 was also intended to protect small stores against foreclosures by setting minimum prices. The Civil Aeronautics Act prevented new airline competition by requiring licenses for airlines to operate. No new licenses were issued until 1978. The war against competition ultimately hurt consumers by keeping prices higher.
Several financial regulators were found in FDR’s estate plan (chapter 10). The Agricultural Coercion Act of 1936 included price controls as well as established output limits to reduce food supplies and support prices. Under the Agricultural Revolution Act, the federal government was responsible for literally completely exterminating food at a time when hundreds of thousands of Americans were going hungry.
Finally, the AAA was also ruled unconstitutional in 1936, but was replaced by the Soil Conservation and Preservation Act which reduced acreage for food. By giving crops, farmers grow grass and vegetables. Market orders (quotas) for Agricultural agricultural markets have been recreated under the 1937 Agreement Act.
Another attempt to bail out farmers was the Commodity Credit Corporation, which made loans to farmers using their crops as collateral. If the price of crops falls, farmers have the opportunity to save money and release crops. This situation mainly benefited the wealthy farmers who owned more land. The Security Administration also made loans to farmers. Powell notes that the FSA has contracted its loans not to poor areas, but to swing states. Powell also points out that despite these programs, farm foreclosures remained high throughout the depression. There were simply too many farmers in the post-WWI period.
Finally, FDR was so angered by the Supreme Court’s rulings on unconstitutional petitions that he tried to reform the court (chapter 15). The court bill, formally known as the Judicial Reorganization Bill of 1937, allowed FDR to add more justices to the Supreme Court. The bill ultimately failed, but the justices, especially Hughes and Roberts, seemed so frightened that they struck a deal against the New Laws. Many of the New Deal policies were clear violations of the Commerce and Commons Clauses of the Constitution, as well as the 9th and 10th amendments.
One of the most famous institutions of the New Deal era was the Tennessee Valley Authority (chapter 11). TVA’s mission was to build dams and bring electricity to rural communities. While things were going well, TVA had its side. For example, TVA took over property from private interests and individuals through eminent domain. Powell also found that TVA states were slower to transition from agricultural economies to more profitable manufacturing jobs. Lower wages found in rural states reduced the demand for electricity.
Another perceived benefit of the TVA was flood control. The levees built by the TVA were supposed to help regulate the natural cycle of flooding in the rivers. However, Powell points out that the permanently flooded areas covered by TVA lakes cover a larger area than is typically flooded by rivers.
Unprecedented spending aimed at revitalizing the economy, what are the effects of New Deal spending? FDR’s secretary of the Treasury, Henry Morgenthau, said it best when he told the House Ways and Means Committee in 1939, “We are spending more money than we ever spent before and it is not working….I mean after eight years of this administration we have as great unemployment as when we started and copper we gather a foreigner[5].
In fact, in 1938, they had entered a depression within the cavity Unit. The New Deal’s plans were helping the labor unions, and consequently in the increased costs of labor and the disruptions it is based on. In response, many businesses have replaced their workers’ machines. Taxes are intended to increase the amount of money available to both businesses and consumers. In 1942, the government started a detained income tax to get money into the hands of the government more quickly.
If New Deal programs exacerbated the Great Depression, what helped the US recover? The wisdom of the convention was that World War II and the massive production of the Allies ended the necessary depression. In fact, this trip was like the stimulus of our time. It didn’t put people to work a little longer, but the cost of the national debt skyrocketing. And when he stopped using the government, he left the jobs.
As the Wall Street Journal noted, both FDR and his successor Harry Truman wanted more new policies after WWII. This new New Deal included federal health care, government subsidies for housing, more work; and “the right to a useful and remunerative job.”
But under the leadership of Georgia Senator Walter F. George, then Chairman of the Senate Finance Committee, Congress cut taxes. The overall tax rate was reduced from 94% to 86.45% and the amount of immunity from taxes was increased. This change meant that an additional twelve million Americans paid no income tax refund at all. In addition, the excess profits tax was abolished and the corporate income tax was reduced from 90% to 38%. In addition, the cost of FDR controls has been eliminated.
Senator George states that the tax bill “incentivizes the expansion of businesses to bring in greater revenue” [6] was correctly approved. The US was collecting more tax than it had, when taxes were higher and budget deficits turned into budget surpluses. Unemployment rates have fallen to a fraction of what they had been during the 1930s.
Powell points to other instances in which cuts in taxes and government spending helped to solve sound economic problems (chapter 19). During the Panic of 1837, Martin Van Buren shut down spending and taxes. In 1892, Grover Cleveland followed the government spending to solve the decline in prices. In 1920, Warren G. Harding promoted the most aggressive price before the decline of the Great Depression. Prompted by the secrets of Treasury Secretary Andrew Mellon, he decided to do so by cutting the government.
There have been other instances of tax cuts and spending cuts stimulating economic growth. Taxes were cut by Presidents Kennedy, Reagan and Bush and in both cases there was temporary economic growth and tax increases [7]. Other presidents, such as Lyndon Johnson, Richard Nixon, Jimmy Carter, and our own Barack Obama, found that high levels of taxation and regulation led to economic stagnation, high unemployment, and rising inflation.
We can learn from past financial successes and mistakes. President Roosevelt’s New Deal programs, well designed, were expensive and ultimately not only ineffective, but fruitless. New Deal programs caused fifteen years of economic stagnation. The US economy did not fully recover from the Great Depression until after WWII when taxes were abolished and freedom to markets returned. This success has been replicated (and foreshadowed) many times in US history through spending and tax cuts against economic problems. If the federal government continues to follow FDR’s example, we can expect a long period of economic stagnation until the next administration is willing to embrace free market ideas.
Notes:
1. http://www.econreview.com/events/banks1929b.htm
2. http://www.fff.org/freedom/fd0609d.asp
3. http://www.answers.com/topic/schechter-poultry-corporation-v-united-states
4. http://www.usnews.com/money/blogs/the-best-life/2009/05/12/social-security-medicare-busts-move-closer
5. http://www.cnsnews.com/public/content/article.aspx?RsrcID=41784
6. http://online.wsj.com/article/SB10001424052702304024604575173632046893848.html
7. http://www.heritage.org/Research/Reports/2001/05/Lowering-Marginal-Tax-Rates
Powell, Jim. FDR’s Folly. Corwn Forum New York, 2003.
