Week 9

Price and Production Instability

John Maynard Keynes greatly influenced the ideas of fiscal policy. Keynesianism says that economic downturns result from insufficient demand. This means there are many “idle resources” in the economy. In times of depression, prices may fall and consumers may still not have the ability to make purchases.

In the market system, millions of individual people make millions of decisions each day about what to consume and what to produce. Sometimes production will exceed demand, pushing supply up and driving prices down. Sometimes it is difficult for production to keep pace with demand, leading to shortages and higher prices. This process leads to another weakness of capitalism and the market system—price and production instability. This is also part of the business cycle, as growth in capitalism is inconsistent.

There are several causes of price and production instability—inaccurate decisions about future market trends, producing more than the current market requires, or reduced investment in future research and development. Other causes are related to consumer actions, for example a decline in overall demand, often related to a lack of consumer confidence or when wages do not keep pace with the production of goods and services. When this happens, workers do not have the income to purchase the production that exists, surpluses build up, and production must decline to allow sales to catch up with inventory. These surges of too much and too little are bad for the economy. Too much production causes the businesses to have to cut expenses. Too little production causes some people to have to go without. Both of these eventually lead to slower production and can lead to economic recession (a general slowdown in the economy) or even depression (a deeper more pronounced slowdown in the economy).

Fiscal Policy & John Maynard Keynes

Economists have dedicated much of their time and energy to seeking solutions for recession and depression. Many of these economic policy solutions can be categorized as fiscal policy or monetary policy.

Fiscal policy is when the government increases spending or taxes in order to help smooth the fluctuations of the economy. This power is controlled by Congress and is exercised through legislation; however, this spending and taxing is only fiscal policy when used to manage the economy. For example, if the government requisitions a purchase of 10,000 pencils for use by IRS employees, it is not practicing fiscal policy. If the government purchases 10,000 pencils to stimulate production in the timber and mining industries, it is practicing fiscal policy.John Maynard Keynes greatly influenced the ideas of fiscal policy. Keynes was a wealthy, educated, and brilliant economist who lived in the 1800s. Keynesianism says that economic downturns result from insufficient demand—not enough people are buying stuff. Theoretically, supply and demand meets at an equilibrium price that clears the market. Keynes, however, says that the equilibrium gets thrown off when suppliers produce too much and the decreasing prices do not encourage more consumption. This means there are many “idle resources” in the economy—the productive assets not being used—and this inefficiency causes economic stagnation. In times of depression, prices may fall and consumers may still not have the ability to make purchases which encourages more production.

Keynes argues that in these times a government should use fiscal policy to increase demand and encourage production. There are two tools to do this. The first is the tax cut which enables more money to be kept by the people.. The second tool is government spending which enables the government to cover for jobs lost in the private sector. When this happens, it really doesn’t matter what the government spends the money on: it can build museums, construct roads, or even hire people to dig holes and fill them back up again. The important part is that the people being paid can now consume.

Keynes’s argument was radical at the time. Many considered it to be socialistic since the government (state) takes responsibility for managing the economy. In actuality, the Keynesian theory seeks to explain and overcome one of the inherent weaknesses of capitalism. Some critics are concerned that a budget deficit is created when Keynes’s fiscal policy is used. Keynes, however, argues that deficits are necessary during a recession because it provides capital that supports government stimulus—it is not intended to be a long-term practice.

After the recession or depression ends and the economy recovers, governments should raise taxes and reduce spending to rebalance the budget. To those who countered that this government activity might have a negative effect on the economy in the long run, Keynes said, “In the long run we are all dead.” In other words, we need to focus on the here and now—get demand back into alignment with supply and the rest will take care of itself.

Economists and historians continue to debate the relevance of Keynes’ arguments. Its advocates place Keynesianism at the middle ground between the extremes of socialism and laissez faire.There are pieces of Keynesianism that appeal to much of the political spectrum. And the battle for and against these policies rages and usually forms an important issue in every election cycle.

Price Instability and Monetary Policy

As production levels vary, prices and value vary as well. This creates price instability, another weakness in the market system. This instability can create inflation or deflation in the economy, which is a change in the value of a nation’s currency.

Money performs three functions that are crucial to economic activity. First, it provides a medium of exchange rather than using a crude barter system. Second, it serves as a unit of account—a standardized unit of measurement that improves our economic decisions. Third, it holds its value indefinitely. This is important because capitalism requires saving rather than immediate consumption. Capital grows by saving and investing—banks, stocks, bonds—rather than consuming resources. This pool of capital is then used to grow the market.

The Constitution indicates in Article I, Section 8: “The Congress shall have power to … coin money and regulate the value thereof.” The government has a vital role in providing a medium of exchange and controlling the value of the money it creates.

In 1913, this power was greatly expanded when President Wilson created the Federal Reserve System (sometimes called “The Fed”). This gave the American people more control over the money supply through their government representatives instead of private banks and interests. This government agency is over “monetary policy,” which means increasing or decreasing the money supply as needed. The Fed can, through open market operations and manipulating interest rates, increase or decrease the amount of money in circulation. It can also regulate the money supply through the buying and selling of government securities.

Money is also subject to the laws of supply and demand and has a price. We call the price of money the interest rate—the amount you must pay to borrow money from a lender. When the Fed raises interest rates, banks also raise their rates, and consumers borrow less money. This causes the money supply to contract. When the Fed lowers interest rates, banks lower their rates, and consumers borrow more money. This causes economic activity to grow, and the money supply expands. When interest rates are low and money is cheap, firms can more easily expand, individuals can more easily buy homes, and entrepreneurs can more easily start businesses. This is why The Fed engages in quantitative easing (increased money supply) when the economy is slow. A high money supply decreases the risk of bank failure. Remember, banks receive our money as deposits but only keep a portion of it on hand. They lend out the rest at interest and that is how they make a profit. This is not a problem unless too many depositors withdraw money at once—we call this a bank run. This is a failure of the whole system. If the money supply is high, then banks have access to more cash and can survive a bank run.

The Fed doesn’t always keep a high money supply for a multitude of reasons. First, a high money supply can create economic bubbles. These bubbles occur when people borrow heavily to purchase assets without intrinsic value. These assets are insubstantial, empty, bubble-like. When these bubbles pop, prices plummet, people lose money, and can’t pay their loans. This causes the economy to contract (most recently seen during the 2008 crash).

Inflation and Deflation

Increasing the money supply will generally increase the rate of inflation—the general increase in prices and fall in the purchasing power of money.

Deflation is its opposite—the reduction of the general level of prices in an economy. Economists use indexes, the measuring of prices over time, to measure inflation and deflation. Examples of these indexes are the consumer price index and the wholesale price index. A consumer price index is a government survey of the price of goods typical consumers purchase regularly. Each month the total price of those goods is compared to the months before. If the price is going up, that is considered to be inflation. If the price is going down, that is considered to be deflation. The wholesale price index simply attempts to measure inflation or deflation before it reaches the consumer level.

The last noticeable period of deflation in the United States occurred during the Great Depression. The value of money during a period of deflation actually increases because each dollar buys more. Although a situation where the cost of what people buy is going down seems attractive, it is usually accompanied by a corresponding reduction in wages and salaries, increased unemployment, and reduced productivity in the economy.

When inflation takes place there are “winners” and “losers.” This happens as the value of money goes down because each dollar buys less. The winners during inflation are those who borrow money, debtors, or those who own real estate. When money is borrowed to finance the purchase of a home in times of inflation, for example, the borrower is able to pay off the mortgage using dollars that are worth less and less as time goes on. When the home is finally paid for, inflation will have also made the value of the home go up, thus the borrower wins again. The government is a winner during inflation because the government is the greatest borrower. Personal incomes generally rise with inflation, so taxes go up.

The losers during a period of inflation are lenders, such as banks, who loan money. Lenders recognize and plan to protect themselves by charging sufficient interest to cover their losses; in a highly unstable market, however, this does not always work. Savers, or money holders, also lose money during inflation, as the interest rate paid to savers does not keep pace with inflation. Despite this possibility of loss, it is important to note that saving is still important. Without savings, individuals cannot be prepared against economic “rainy days” nor can they take advantage of economic opportunities. Additionally, without savings there would not be sufficient capital in the market to allow for investment and growth.

Historically, most inflation in the United States occurred during periods of war because of full-employment, increased wages, and a limited amount of consumer goods. America has, for the most part, enjoyed a relatively stable economy and a moderately growing inflation rate since the end of World War II. As just one example, in 1970 the average price of a gallon of gas was near fifty cents and the price of an average new car was around 3500 dollars. Today the price of gas is closer to three dollars and the price of a new car closer to 30,000 dollars. The difference between the two is what happens over a long period of inflation.

There are several reasons for this long period of inflation. First, people tend to prefer rising wages and profits to declining wages and profits and this makes it difficult to adjust to prices shifting downward. Second, environmental concerns and increased scarcity of some key resources has caused production costs to continue to rise. Third, there are automatic stabilizers built into the system, such as cost of living adjustments in entitlement and welfare programs, thus each increase in the economy triggers further increases in government payments. Fourth, the Federal Reserve’s aggressive use of monetary policy to stimulate and maintain economic growth increases the money supply which leads to inflation. And fifth, the increased use of fiscal policy to stimulate and maintain economic growth has led to increasing government spending.

Inflation is dangerous because it weakens the three functions of money—as a medium of exchange, its account function, and its store of value. People are less willing to accept inflated money in transactions. It’s difficult to use money as a measuring stick in transactions when the value of money is unstable and constantly changing. And finally, inflation spoils the value of money, making it worth less over time and difficult to store. This discourages thrift and deferred gratification which leads to the saving and capital accumulation that helps capitalism succeed.

A few problems exist. First, when using monetary policy to stimulate the economy to fight a recession, it might cause inflation or deflation. Second, the Fed is celebrated or hated because of something that is not entirely in their control.

There are also dangers in using fiscal policy. Using fiscal policy to fight recessions (cutting taxes) can be politically popular, but can lead to deficit spending. It is difficult to use fiscal policy to fight inflation (raising taxes). It is politically unpopular and too slow.

Some may argue that the aggressive use of fiscal and monetary policy since the end of the Great Depression has maintained economic stability in America. Others argue that the use of fiscal and monetary policy has resulted in slower growth in the American economy and has artificially interfered with the natural operations of the laws of supply and demand. Recessions can result from inappropriate actions by the government—no action at all when it should have taken action, or an inappropriate use of fiscal or monetary policy when it does take action. Students should seek to understand these various points of view.

The Great Depression

The Great Depression was the worst economic disaster in American history. There are disagreements between historians as to what caused the Great Depression, though most scholars would include the following:

The Great Depression is also a great example of the possible problems created by production and price instability. The Great Depression, beginning in 1929, caused loss and hardship for many Americans. It created a recognizable set of behaviors and fears across a generation. This is one reason it is sometimes referred to as “The Invisible Scar.” Because the depression heavily impacted so many, there was a general demand for the government to step in and help. President Franklin D. Roosevelt and other political leaders enacted the “New Deal” plan. This plan made several programs to provide jobs and money that would help stimulate the economy (social security, The National Labor Relations Board, and others still exist today). It also set the new precedent of how the government would respond to such depressions.

There were many causes that led to the Great Depression. But most of it can be tied to the first World War. Wars tend to have a greater consumption of goods. Other countries on the front (like Great Britain) could not produce enough for themselves and America had the means to help. This inability to overproduce led to tremendous wealth in America. However, wars end. When World War One ended, the demand decreased and created surplus. Across the nation, people were laid off and farmers lost their farms.

Overproduction and reduction in purchasing followed a cycle: first, farms and factories overproduced beyond demand. Because of that, businesses would cut production, which meant workers suffered from wage cuts and layoffs. Because of the reduced pay or hours, people had little or no money to spend. Because they didn’t have money to spend, the demand for goods fell, which would restart the cycle as businesses would cut production.

These problems existed in the 1920s, but the final cause was the Stock Market Crash of 1929. Rampant, unregulated speculation of the stock market financed by borrowed money inflated stock prices artificially. This upregulation led to 11 billion dollars of wealth in October of 1929. And because of the interconnections of the world economy, the Great Depression was a global phenomenon. Between 1929 and 1933, when President Roosevelt replaced President Hoover, nearly every aspect of the economy worsened.

President Hoover did manage some of the effects of the Great Depression and put some government programs in place. He initiated federal construction projects (like the Hoover Dam) and tried to offer federal assistance to banks and insurance companies to help them avoid bankruptcy. However, these efforts did not pump enough capital into the system to get the economy going again. In addition, most of the federal action came on behalf of banks, insurance companies, and construction companies. This caused people to accuse Hoover of helping banks rather than helping people. Hoover’s most notorious misstep was his handling of the Bonus Army protest.

The Bonus Army was made up of World War I veterans who wanted an advance on their bonus checks. These checks were promised to them to be redeemed in 1945 to help with their current situation. Thousands began to march on Washington, D.C., including wives and children. They protested on the steps of the capitol and then moved to a nearby park where they set up tents to continue their pressure on Congress. Hoover refused to support the marchers, and asked General Douglas MacArthur to remove the protesters. They were driven out by soldiers and armed vehicles, and the tents were burned down. This hurt Hoover’s reputation and was used as evidence that he didn’t care about the people.

In this excerpt from FDR’s 1933 Inaugural Address, the environment the new president came into is evident. He appeals to the Constitution and the long-history of American struggle through difficult times to support his desire for the government to step in.

FDR, First Inaugural Address, 1933

This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure, as it has endured, will revive and will prosper.

So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. Values have shrunk to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; and the savings of many years in thousands of families are gone. More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment …

Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing great—greatly needed projects to stimulate and reorganize the use of our great natural resources … 

WPA poster.
And finally, in our progress towards a resumption of work, we require two safeguards against a return of the evils of the old order. There must be a strict supervision of all banking and credits and investments. There must be an end to speculation with other people's money. And there must be provision for an adequate but sound currency …

Action in this image, action to this end is feasible under the form of government which we have inherited from our ancestors. Our Constitution is so simple, so practical that it is possible always to meet extraordinary needs by changes in emphasis and arrangement without loss of essential form. That is why our constitutional system has proved itself the most superbly enduring political mechanism the modern world has ever seen.

It has met every stress of vast expansion of territory, of foreign wars, of bitter internal strife, of world relations. And it is to be hoped that the normal balance of executive and legislative authority maybe wholly equal, wholly adequate to meet the unprecedented task before us. But it may be that an unprecedented demand and need for un-delayed action may call for temporary departure from that normal balance of public procedure. I am prepared under my constitutional duty to recommend the measures that stricken nation in the midst of a stricken world may require.

Social Security Ad 1935.
These measures, or such other measures as the Congress may build out of its experience and wisdom, I shall seek, within my constitutional authority, to bring to speedy adoption. But, in the event that the Congress shall fail to take one of these two courses, in the event that the national emergency is still critical, I shall not evade the clear course of duty that will then confront me. I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.

We do not distrust the future of essential democracy. The people of the United States have not failed. In their need they have registered a mandate that they want direct, vigorous action. They have asked for discipline and direction under leadership. They have made me the present instrument of their wishes. In the spirit of the gift I take it.

In this dedication—In this dedication of a Nation, we humbly ask the blessing of God. May He protect each and every one of us. May He guide me in the days to come.

In 1933, Roosevelt began implementing the programs he had called the New Deal during his campaign. The program was based on Keynesian principles of government spending. These programs had many facets to provide relief, recovery, and reform. In the first 100 days of his presidency, he passed many programs through Congress to help deal with the broken American economy. The Federal Emergency Relief Act (FERA) pumped $500 million dollars in to state-run relief programs. The Emergency Banking Relief Act permitted solvent banks to reopen under government supervision. It also created the Federal Deposit Insurance Corporation (FDIC) to restore trust in banks and guarantee deposits. The Civilian Conservation Corps (CCC), Public Works Administration (PWA) and Works Progress Administration (WPA) helped provide jobs and a basic level of income to get the economy going. The government encouraged the creation of jobs in the private sector and protected the rights of unions to organize in worker’s interests with the National Industrial Recovery Act (NIRA) and the Wagner Act. The Securities and Exchange Commission (SEC) was tasked with regulating the financial market excesses that had led to the stock market crash.

A graph showing the stock market before and after Black Tuesday. In 1929, prior to Black Tuesday, the market was peaking at roughly 350, with a sudden drop to 200 overnight. The graph shows a continual degradation until 1932, where the market hit a low of 40. After 1932, it slowly rebuilds.
With the Social Security Administration (SSA), the government took responsibility for the economic well-being of senior citizens, a group often susceptible to economic crises. To help farmers and regulate commodities prices, the Agricultural Adjustment Act (AAA) partnered the government and major producers to help raise prices. To bolster support for these programs, Roosevelt gave radio speeches, called “Fireside Chats,” which communicated directly the goals of his administration to the American people.

There were some voices at the time who believed Franklin Roosevelt and the New Deal were contrary to American ideals, anti-capitalistic, and an infringement on individual liberty. Opposing forces in Congress challenged the reach of his power, and several of the New Deal programs were found unconstitutional. Other critics of the New Deal, however, thought that Roosevelt’s programs did not go far enough to combat the ills of capitalism. One such voice was Huey Long, a senator from Louisiana and an advocate for what he called “Share the Wealth.” His slogan was “None too big, none too little, but every man a king,” and the program’s main feature was to guarantee each family a minimum income by increasing the tax rate on the wealthy. His proposals went beyond the scope of the New Deal to guarantee a larger safety net. The appeal of Long and others demonstrated the continued suffering and difficulties experienced during the Great Depression.

Senator Huey P. Long, Share The Wealth (Radio Speech, 1934)

I contend, my friends, that we have no difficult problem to solve in America, and that is the view of nearly everyone with whom I have discussed the matter here in Washington and elsewhere throughout the United States—that we have no very difficult problem to solve. It is not the difficulty of the problem which we have; it is the fact that the rich people of this country—and by rich people I mean the super-rich—will not allow us to solve the problems, or rather the one little problem that is afflicting this country, because in order to cure all of our woes it is necessary to scale down the big fortunes, that we may scatter the wealth to be shared by all of the people …

How many of you remember the first thing that the Declaration of Independence said? It said:

"We hold these truths to be self-evident, that there are certain inalienable rights for the people, and among them are life, liberty, and the pursuit of happiness;" and it said further, "We hold the view that all men are created equal." Now, what did they mean by that? Did they mean, my friends, to say that all men are created equal and that that meant that any one man was born to inherit

$10,000,000,000 and that another child was to be born to inherit nothing? …

Now, my friends, if you were off on an island where there were 100 lunches, you could not let one man eat up the hundred lunches, or take the hundred lunches and not let anybody else eat any of them. If you did, there would not be anything else for the balance of the people to consume. So, we have in America today, my friends, a condition by which about 10 men dominate the means of activity in at least 85 percent of the activities that you own. They either own directly everything or they have got some kind of mortgage on it, with a very small percentage to be excepted. They own the banks, they own the steel mills, they own the railroads, they own the bonds, they own the mortgages, they own the stores, and they have chained the country from one end to the other until there is not any kind of business that a small, independent man could go into today and make a living, and there is not any kind of business that an independent man can go into and make any money to buy an automobile with; and they have finally and gradually and steadily eliminated everybody from the fields in which there is a living to be made, and still they have got little enough sense to think they ought to be able to get more business out of it anyway …

Now, we have organized a society, and we call it "Share Our Wealth Society," a society with the motto "Every Man a King.” Every man a king, so there would be no such thing as a man or woman who did not have the necessities of life, who would not be dependent upon the whims and caprices and ipsi dixit of the financial barons for a living. What do we propose by this society? We propose to limit the wealth of big men in the country. There is an average of $15,000 in wealth to every family in America. That is right here today.

We do not propose to divide it up equally. We do not propose a division of wealth, but we propose to limit poverty that we will allow to be inflicted upon any man's family. We will not say we are going to try to guarantee any equality, or

$15,000 to a family. No; but we do say that one third of the average is low enough for any one family to hold, that there should be a guarantee of a family wealth of around $5,000; enough for a home, an automobile, a radio, and the ordinary conveniences, and the opportunity to educate their children; a fair share of the income of this land thereafter to that family so there will be no such thing as merely the select to have those things, and so there will be no such thing as a family living in poverty and distress.

We have to limit fortunes. Our present plan is that we will allow no one man to own more that $50,000,000. … Those are the things we propose to do. "Every Man a King." Every man to eat when there is something to eat; all to wear something when there is something to wear. That makes us all a sovereign.

You cannot solve these things through these various and sundry alphabetical codes. You can have the N. R. A. and P. W. A. and C. W. A. and the U. U. G. and G. I. N. and any other kind of dad-gummed lettered code. You can wait until doomsday and see 25 more alphabets, but that is not going to solve this proposition. Why hide? Why quibble? You know what the trouble is. The man that says he does not know what the trouble is just hiding his face to keep from seeing the sunlight. God told you what the trouble was. The philosophers told you what the trouble was; and when you have a country where one man owns more than 100,000 people, or a million people, and when you have a country where there are four men, as in America, that have got more control over things than all the 120,000,000 people together, you know what the trouble is.

CCC poster, 1934.
The New Deal did not bring the Great Depression to an end. Only the massive public sector spending of World War II eventually brought the economy back onto stable footing. However, Roosevelt did stop the economic free-fall of the American economy, and help avoid the economic and political instability that plagued other nations of the world in this same time period.

The New Deal does provide several economic legacies, however, that continue to influence government response to economic challenges down to today. First, as a result of the New Deal people came to accept the government’s role as problem solver, economic stimulator, and economic regulator. Government became responsible to intervene in the interest of economic justice and to provide an economic safety net to protect people from economic disaster. These ideas were outlined in what FDR called his “Economic Bill of Rights” (see below). Second, the New Deal strengthened the notion of big government as positive good, as new agencies were created to administer and oversee programs, and more people came to be employed by the federal government. Third, the New Deal shaped the future of both the Democratic and Republican parties. Henceforth, the Democrats would be seen as the party committed to finding government solutions to economic problems within capitalism, and the Republicans became more identified with private sector economics. However each party now operates in the new political environment created by the New Deal, in which the government has a role to play in maintaining and protecting economic responsibility and opportunity. Fourth, the New Deal helped maintain faith in American democracy and capitalism. Many were convinced that the Great Depression demonstrated the failure of capitalism in America.

Thousands joined the communist party and other radical movements. New Deal government programs were always meant to save the free market, and in the moderate political conditions of the time were able to keep in place the fundamentals of capitalism. Other nations, like Germany and Japan, took more radical economic and political steps to deal with the effects of the worldwide depression, making the United States almost conservative in comparison.

Since the New Deal, historians have differed in their interpretations of both the causes of the Great Depression and the effectiveness of the New Deal in combating its problems. Some voices see the New Deal as a necessary evolution of economic actions by government to save the American people in an increasingly complex and worldwide economy. Some have argued that the New Deal didn’t go far enough in its reach, leading to a Depression that lasted more than a decade and did not solve the problems of inequality and poverty. Others have questioned whether these New Deal programs unwittingly lengthened the suffering caused by the Great Depression by interfering in the free market in ways that were counter-productive and damaging.

One such voice is economist Lawrence W. Reed of the Mackinac Center for Public Policy. His pamphlet, “Great Myths of the Great Depression,” has been reprinted widely since its appearance in 1981. His main argument is that the common explanation for the Great Depression, that it was caused by free-market capitalism, is flawed. He rejects the Keynesian economic model. He contends that poor government policy not only helped cause the Great Depression, but actions taken afterward lengthened and deepened the economic catastrophe.

Great Myths of the Great Depression: Lawrence W. Reed

Many volumes have been written about the Great Depression and its impact on the lives of millions of Americans. Historians, economists, and politicians have all combed the wreckage searching for the “black box” that will reveal the cause of this legendary tragedy. Sadly, all too many of them decide to abandon their search, finding it easier perhaps to circulate a host of false and harmful conclusions about the events of seven decades ago.

How bad was the Great Depression? Over the four years from 1929 to 1933, production at the nation’s factories, mines, and utilities fell by more than half.

People’s real disposable incomes dropped 28 percent. Stock prices collapsed to one-tenth of their pre-crash height. The number of unemployed Americans rose from 1.6 million in 1929 to 12.8 million in 1933. One of every four workers was out of a job at the Depression’s nadir, and ugly rumors of revolt simmered for the first time since the Civil War. Old myths never die; they just keep showing up in college economics and political science textbooks. Students today are frequently taught that unfettered free enterprise collapsed of its own weight in 1929, paving the way for a decade-long economic depression full of hardship and misery. President Herbert Hoover is presented as an advocate of “hands-off,” or laissez-faire, economic policy, while his successor, Franklin Roosevelt, is the economic savior whose policies brought us recovery. This popular account of the Depression belongs in a book of fairy tales and not in a serious discussion of economic history, as a review of the facts demonstrates.

On the eve of America’s entry into World War II and twelve years after the stock market crash of Black Thursday, ten million Americans were jobless. Roosevelt had pledged in 1932 to end the crisis, but it persisted two presidential terms and countless interventions later. Along with the horror of World War II came a revival of trade with America’s allies.

The war’s destruction of people and resources did not help the U.S. economy, but this renewed trade did. More importantly, the Truman administration that followed Roosevelt was decidedly less eager to berate and bludgeon private investors, and as a result, those investors came back into the economy to fuel a powerful postwar boom.

The genesis of the Great Depression lay in the inflationary monetary policies of the U.S. government in the 1920s. It was prolonged and exacerbated by a litany of political missteps: trade-crushing tariffs, incentive- sapping taxes, mind-numbing controls on production and competition, senseless destruction of crops and cattle, and coercive labor laws, to recount just a few. It was not the free market that produced twelve years of agony; rather, it was political bungling on a scale as grand as there ever was.

The debates continue, but there is no argument about the far-reaching impact of the Great Depression and New Deal on economic policy and political culture in the United States. In 1944, in his State of the Union address to Congress, with World War II raging, Roosevelt outlined his plans for the future. In this document, you can see the influence of New Deal programs on the political conversation, with echoes that are still heard today.

The Economic Bill of Rights: Franklin D. Roosevelt (1944)

It is our duty now to begin to lay the plans and determine the strategy for the winning of a lasting peace and the establishment of an American standard of living higher than ever before known. We cannot be content, no matter how high that general standard of living may be, if some fraction of our people—whether it be one-third or one-fifth or one-tenth—is ill-fed, ill-clothed, ill-housed, and insecure.

This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights—among them the right of free speech, free press, free worship, trial by jury, freedom from unreasonable searches and seizures. They were our rights to life and liberty. As our nation has grown in size and stature, however—as our industrial economy expanded—these political rights proved inadequate to assure us equality in the pursuit of happiness.

We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. "Necessitous men are not free men." People who are hungry and out of a job are the stuff of which dictatorships are made. In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all—regardless of station, race, or creed. Among these are:

  • The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;
  • The right to earn enough to provide adequate food and clothing and recreation;
  • T he right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
  • The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
  • The right of every family to a decent home;
  • The right to adequate medical care and the opportunity to achieve and enjoy good health;
  • The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
  • The right to a good education.

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being. America's own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for our citizens.

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