Making the Depression Great

By

Cara Crystal

History 1700

Cantera

19 April 2011
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Economic laws are just as real as the laws of gravity in the sense that they are proven and

inescapable. The Great Depression is an economic lesson just as much as it is a history lesson,

so to try to explain 1929 – 1941 without explaining the rules that govern the outcomes of what

policies were enacted would be nonsensical and confusing. In an effort to understand the Great

Depression, one must understand the balance of three major economic laws; the fact that

destruction and waste do not bring about prosperity, the fact that growth is only possible through

under-consumption and saving resources, and the law of supply and demand.

The Great Depression, or any economics recession, is due to what is known as the

business cycle theory – where businesses experience cycles of “booms” in production and profit,

then a “bust” when times are tough. Business cycles happen because of the law of supply and

demand which simply states that when something is rare, people are willing to pay more to have

it and its value is high. When something is abundant and easily attainable, people will not give

up as much to have it; its value is low. Imagine there are only 500 whistles in the world. All the

top officials and referees are willing to pay anywhere near $5,000 for a single whistle as it will

make it easier for them to be heard when calling out a foul on a noisy court. Now imagine the

whistle production kicks off and there are now millions of whistles around the world and anyone

can buy one for as little as $1. Though their usefulness on the court is still prominent amid

screaming fans, the influx in supply has decreased their value and demand.

The law of supply and demand is the underlying principle behind inflation. In Personal

Finance: Turning Money into Wealth by Arthur J. Keown, inflation is described as “An

economic condition in which rising prices reduce the purchasing power of money” (Keown, 9).

That is to say that by an increase in prices, the dollar can no longer buy as much as it used to.

This explanation is totally backwards. Rising prices do not cause inflation – inflation causes
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rising prices. When the Federal Reserve creates more money by printing paper dollars or

digitally injecting more into the system, the dollar becomes less rare and is worth less.

To find where the law of supply and demand played its role in the bleakest time in

American history, one must look at the most prosperous time in the U.S. – the “Roaring

Twenty’s.” Because the Federal Reserve had increased the money supply during this time, the

dollar became less valuable and it became easier for anybody to get a loan because anybody

could afford the interest. Interest is a fee paid to the lender of the capital, usually a percentage of

what was borrowed. The abundant dollar was less valuable, so the interest was low. Banks, like

any business, can only charge what the product is worth.

The Roaring Twenty’s came as a result in part of the expansion of industry and

construction as soldiers were returning home from World War I and assimilating into the work

force, and part in because of the “easy money” policies allowed by the Federal Reserve. As

stated above, almost anyone could get a loan because it would be easy to pay off, hence the term

“easy money.” This caused huge speculation in the stock market and an increase in buying

things like cars, furniture, and appliances – what items the population used to have to save up

for, they could now get immediately and pay for later.

This led to the 1929 stock market crash. People were borrowing so much money and

throwing it at shares that the stocks were artificially priced high because it looked like they were

wanted and valuable. Stocks only looked like they were worth so much because people were

putting money into them, but when time came to pay out, there was nothing of worth to back

them up as collateral. It had all been a bubble. When it burst, and people realized their shares

were overpriced, they all tried to sell as fast as they could before the prices dropped down to

their actual levels and shareholders would be forced to admit they spent too much on a stock.
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Traditionally, blame for the stock market crashing is put on marginal trading. In

marginal trading, investors pay $40 for a $100 stock, essentially borrowing $60 from the broker

that will be paid back when the investor sells their share for a profit. Marginal trading, or

borrowing to invest, did play a part in causing so many companies to go bankrupt. Since so

much money was being borrowed, firms that declared “marginal calls,” demanding the $60 loan

to be paid back, would only be met with investors who did not have the money to pay back, since

they had borrow it in the first place. Since the companies could not get their money when they

needed it, they would go bankrupt. To blame the sole reason of the crash on marginal trading is

ignoring the moral hazard behind what allowed so much borrowing. Again the Federal Reserve

is put in the spotlight. The “Fed” made the inflated dollar easy to get a hold of – making it

enticing to unwisely dump money into investments without doing research as to whether the

company was profitable or bound for failure. Investors thought any stock would perform

fantastically, so they put their money anywhere, even in stocks that weren’t worth as much as the

price tag.

America was not the only one who had supply and demand issues. During World War I,

Europe was unable to produce enough food, as a result of wheat fields being converted into

battle fields. American farmers became the biggest producers and suppliers, feeding both

themselves and Europeans whose war-torn situation made it impossible to grow their own

substance. When the war finally ended and European agriculture became self-sufficient,

American agriculture experienced a decline. Because one of its biggest buyers were no longer

purchasing from them, American farmers now had a surplus in their goods and, because of the

law of supply and demand, could not sell them for as high of a price. Farm income went from

$21.4 Billion in 1919 to $11.8 Billion in 1929, being cut almost in half. President Herbert
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Hoover organized the Federal Farm Board (FFB) to help struggling farmers, allocating $500

Million in June 1929 and another $100 Million in 1930 to allow farms a lower interest-rate on

loans. The FFB would also buy up the surpluses in agriculture production, getting it off the

market by storing it away to decrease supply and increase the demand and price (Murphy, 56).

By the time Franklin Delano Roosevelt got into office, so much farm surplus was stored

away in silos, the supplies had been inflated and the products worth less. Roosevelt ordered the

destruction of fields, produce, and livestock in order to boost the prices of these commodities. By

destroying these surpluses, the amount available on the market would go down, prices would

increase, and struggling farmers could get out of the financially hard times.

Or so Roosevelt thought.

The misleading notion that destruction can bring about prosperity is best debunked by

Frederic Bastiat, a French economist in the 1800’s, in his short essay “The Broken Window

Fallacy.” Here, Bastiat tells a story of a baker whose window is broken by a neighbor boy and

the town gathers to discuss the event. At first, everyone is grieved for the baker, until someone

speaks up and, being an optimist, points out the fact that at least now the glazier will benefit,

since the baker will have to hire him to fix the window. The destruction has helped the local

economy, the glazier has performed a service and been paid for it. This is what Bastiat calls that

which is seen, but, that which is unseen is more costly. If the baker didn’t have the expense of

fixing his window, he would have used that money to buy shoes. The town is not more rich

because the window was broken and needed to be replaced, but is in fact more poor. Now,

instead of having a window and a new pair of shoes, the baker has only a window. If a town

could really become better-off by smashing every window and paying someone to fix it, then

America should have became enormously wealthy by destroying millions of pounds of food and
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then having to pay a higher price for what was left.

Under FDR’s leadership, fields were literally burned or plowed under, orchards were left

to sit idle and rot, livestock was needlessly slaughtered (including some 6 million piglets) and

buried in mass graves (Powell, FDR’s Folly. Quoted from: Murphy, 136). While pounds of food

were being destroyed in the countryside, throngs of people went hungry in the cities, all under

the mask of helping the economy. The feelings of anger are masterfully communicated by John

Steinbeck as he recalls the waste that the droves of homeless wanderers witness in his fictitious

book, The Grapes of Wrath: “…in the eyes of the people there is a failure; in the eyes of the

hungry there is a growing wrath.”

Destroying the much-needed produce was not the way to get America out of the

Depression, and neither was the Second World War. WWII is typically credited with getting

America out of the Depression, true, the war was a factor in helping businesses become

industrious – but to believe this myth is to forget the Broken Window Fallacy.

When America entered the war government realized the only way to win a championship

game, where the best of the best is competing for an all-or-nothing prize, is to release your star

players onto the court. In this case, the starting lineup would be the free-market.

In a free market economy, businesses operate on the law of supply and demand to

determine how much of a commodity should be on the market and therefore what the price

should be. If there is a scarf craze, the free market will manufacture a surplus because it is

profitable. However, if fashion designers decide scarves are scruffy-looking and hats are the

new hit, the free market will switch to making headwear. The excess scarves will have to be sold

at a loss, but that is the risk the business took when it decided to make so many. “Free market”

means freedom to experiment, freedom to fail, and freedom from government intervention and
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regulations. There are currently no purely free market economies.

All throughout Franklin D. Roosevelt’s presidency, government had been involved in the

market through the New Deal – a series of legislation and administrations that set price and wage

controls, propped up failing enterprises, and subsidized farms. FDR also randomly set the price

of gold to whatever he felt would be a good number that day, often just picking his favorite or

lucky digits. This led to an unstable economy because entrepreneurs and investors were cautious

with expanding. The falsely inflated prices and wages made it hard to see which sectors to get

into because they were healthy and growing and which were only staying afloat because

government was pumping tax dollars into it. When government finally did let the free-market

take its course, it did what business does best; produce and profit. The industries involved in war

production took off and provided much-needed jobs for the 9.9% unemployed in 1941 (Murphy,

100). However, to say that it was the war itself that got America out of a depression is a mistake.

It was the principles of free-market economy, allowing businesses to set prices and wages to

their rightful level, which actually solved the problem – which the government could have

instigated without the war.

War is destruction and as such does not bring about prosperity. Think of it this way; if

America had been allowed to use its productive ability to produce affordable necessities and

other “shoes,” the standard of living would have risen. In its place, America made tanks, bombs,

and guns to be shipped overseas and blown up in the war. Instead of things they could use at

home, America produced things that were going to be destroyed. In a sense, America was fixing

windows instead of enjoying windows and shoes.

But how does an economy grow in the first place? There are basically two main schools

of thought when it comes to how an economy grows; Keynesian Economics and Austrian
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Economics. Keynesian Economics state that money creation and injection lead to spending,

which lead to increased demand and therefore growth.

However the system is flawed from the beginning; money is not spontaneously produced.

“Money creation” does not just happen on the whim of a government, individual, private

institution, etc. Money, or a system of exchange, comes about naturally as a group of people

discover and invent ways to trade and barter with each other. One cannot “create money” out of

thin air. Even gold must be dug up and refined – it doesn’t just appear on the laps of shoppers.

Today the U.S. creates money “by decree” or fiat money - meaning, “This is only worth

something because I said it is,” it requires a system of trust to be used. A one hundred dollar bill

is literally only worth the paper it’s printed on. But because it was “decreed” valuable, lenders

accept it based on the system of trust and necessity of law. The problem here, however, is that

when the lender gets sick of being paid back with worthless paper and demands something of

actually value, the only thing the borrower has is property and other assets. For America this

would mean land, businesses, natural resources, etc.

The second step, injection, is also bound to fail. Keynesians believe that when a sector of

the economy is struggling, a healthy dose of cash will give it boost to recovery. What they don’t

understand is that in an inflated economy caused by creating money often needs a recession to

get back on the real market levels and prices – what prices and services are actually worth. More

money in an overpriced stock prolongs the inevitable crash, making the recession bigger and

harder to recover from.

The next steps, spending and increased demand, comes from the belief that, if you give

people money during a recession, when people are saving their money, they will loosen their

pocketbooks and put their dollars out on the market where business and productivity will be
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invigorated. This is flawed because when economic times are tough and people are cutting back

on spending, it’s because the market is overpriced, inflated, or unstable. People wisely save their

money until prospects for legitimate growth seem real. By injecting money into an inflated

economy, a brief burst of spending and “stimulation” does occur, but when that inflated period

ends, the recession is even bigger than it would have been, because the growth was not

sustainable.

A sustainable economy is better explained by Austrian Economists: under-consumption

leads to investment, gaining capital, using that capital for increased productivity and finally

growth. For example: a cabinet maker under-consumes by putting some money away. Maybe

he has to forgo his weekly magazine subscription, or sacrifice other luxury items, but with the

saved money comes the reward for his efforts, he is now able to invest in some new capital, say a

power drill, and can assemble cupboards in half the time it took with a manual screwdriver.

Because of his increased productivity, he is able to finish more projects and help more clients in

one day and his personal economy has experienced growth.

Hoover, Roosevelt, and Congress all tried to spend their way out of the Great Depression.

Hoover started the insanity through his public works projects, most notably the Hoover Dam,

building parks instead of manufacturing the necessities people lacked. He also subsidized farms,

wasting $600 million the regulating the farm prices – something the free market would have

done for free.

FDR continued the various public works and administrations, most notably the

National Recovery Act (NRA), though he had near fifteen government agencies to pour money

into. The NRA was responsible for boycotting anyone who did not succumb to the wage/price

controls, which were believed to help avoid monopolies because no one could sell for cheaper
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and drive other businesses out of the job. What it actually did was mandate something be sold

for a more expensive price, therefore wasting money that could have been used to buy something

else. Just as destruction is not growth, neither is waste. However, the NRA proudly proclaimed

“We Do Our Part” anyway (Brody and Henretta, America: A Concise History, 706).

How do we know the programs and spending weren’t working? All we need to do is

look at “the depression within the Depression.” In 1937, FDR decided that being only 7%

behind the 1929 levels meant the economy was in good enough condition to phase out certain

legislation and start balancing the budget. The Works Progress Administration (WPA) was cut

in half, the Reconstruction Finance Corporation was to make no new commitments, and farm

subsidizing and other agencies were reduced. The Federal Reverse reeled in credit, making it

harder to get a loan without good credit history. As Buhite and Levy put it in their book, FDR’s

Fireside Chats, the “1930 recovery was still too fragile to handle the sudden cutback…. It was

nothing short of catastrophic…. 4 million workers were thrown out of work.” Roosevelt’s

answer to the problem was to forget about balancing the budget and flood the market with more

spending, encouraging Congress to quadruple farm subsidies, restore the WPA, and relax credit

(Roosevelt, Buhite and Levy, 111-112).

This is just one inescapable example of the failures of the New Deal. First off, a truly

recovered market is never “too fragile” to get out of debt. What Congress had created was not a

stable economy, but one so inflated that it had to drop again to get to real levels in August of

1937, lasting through that winter and the spring of 1938. Instead of letting the market readjust

on its own, it was once again pumped full of false stimulation and unneeded spending, only

making the future one of bigger deficits and a bigger, inevitable, crash.

Remember is said to be one of the most important words in the English language. If the
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history lessons of yesterday are forgotten today, a nation cannot progress. It’s easier to

see where you’re going when you remember where you’ve been. Recessions prior to 1929 have

been largely ignored by government, and recovery time has been short. Hoover himself claims

he had simply been trying something new when faced with the financial crisis. He said “No

President before had ever believed there was a governmental responsibility in [fixing the

market]. No matter what the urging on previous occasions, Presidents steadfastly [have]

maintained that the Federal government was apart from such eruptions; they had always been left

to blow themselves out…. Because of this lack of government experience, therefore, we had to

pioneer a new field. As a matter of fact there was little economic knowledge to guide us”

(Hoover, Memoirs of Herbert Hoover. Quoted from: Murphy, 27).

In other words, Hoover decided to completely ignore history – ignore the fact that

government shouldn’t step in to rescue business. To set America’s economy right, Hoover

simply needed to take the laissez-faire approach like governments did before the 1920’s. History

had taught that when economies crash and are left to themselves, they rebound. But, instead of

looking at the failed policies and admitting failure, Hoover thinks the massive deficits and

unemployment only prove how bad the situation really was, and thank goodness for him for

stepping in the lessen the impact (Murphy, 28).

Today America is making the same mistake. Instead of letting the free market take care

of prices, wages, supply, etc, government is stepping in and bailing out huge banks, subsidizing

farms, and keeping bubbles inflated instead of letting them fail and readjust – getting rid of

unproductive employees and waste. It does cause a recession. It is painful. But they are the

necessary steps to get America off the inflated bubble to start creating real wealth and prosperity.

Economy can balance when left to itself; the government only comes in to tip the scale.
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Works Cited:

Bastiat, M. Frederic. That Which Is Seen and That Which Is Not Seen. West Valley City: Waking

Lion, 2006. Print.

Brody, David and James A. Henretta. America: a Concise History. 4th ed. Boston: Bedford/St.

Martin's, 2010. Print.

Hoover, Herbert. Memoirs of Herbert Hoover: The Great Depression, 1929-1941. New York:

Macmillan, 1952. Print.

Keown, Arthur J. Personal Finance: Turning Money Into Wealth. 4th ed. New Jersey: Pearson

Prentice Hall, 2007. Print.

Maybury, Richard. Whatever Happened to Penny Candy?: a Fast, Clear, and Fun Explanation

of the Economics You Need for Success in Your Career, Business, and Investments. 6th

ed. Placerville, CA: Bluestocking, 2010. Print.

Murphy, Robert P. The Politically Incorrect Guide to the Great Depression and the New Deal.

Washington, DC: Regnery Pub., 2009. Print.

Powell, Jim. FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression.

New York: Three Rivers, 2003. Print.

Roosevelt, Franklin D., Russell D. Buhite, and David W. Levy. FDR's Fireside Chats. New

York: Penguin, 1993. Print.

Steinbeck, John. The Grapes of Wrath. NY: Penguin, 1939. Print.