The Great Depression: A Critique of Government Interference and the Impact of New Deal Policies

The Great Depression, one of the most severe economic downturns in modern history, has been the subject of extensive analysis and debate. A prevalent theory among some economists and historians, and one with which I agree, is that the Great Depression was largely caused, and made worse by, government interference in the markets, with New Deal programs prolonging rather than alleviating the economic problems. Additionally, this perspective argues that the Great Depression only truly ended when the United States shifted to a war footing during World War Two, stimulating unprecedented economic activity.

The Great Depression, which began with the stock market crash of 1929, was a multifaceted crisis involving banking collapses, high unemployment, and widespread poverty. Many students today grow up reading in their history textbooks that the Great Depression was ended due to Franklin D. Roosevelt’s New Deal programs, but nothing could be further from the truth. Government interference in the market did not solve the Great Depression, and, in fact, largely caused it to begin with. The Federal Reserve's policies in the 1920s laid the groundwork for the economic collapse. The Federal Reserve, established in 1913, aimed to stabilize the economy but often did so with mixed results.

Crowd outside the New York Stock Exchange, October 1929

The Federal Reserve's monetary policy during the late 1920s was flawed. In an attempt to curb stock market speculation, the Fed raised interest rates, making borrowing more expensive. This move choked off investment and consumer spending, leading to a contraction in economic activity. Additionally, the Fed's failure to provide adequate liquidity to banks after the crash made the banking crises that followed even worse, as many banks were forced to close their doors, wiping out savings and reducing the money supply further. In The Great Depression: An International Disaster of Perverse Economic Policies, Thomas E. Hall and J. David Ferguson argued that the Great Depression was largely caused by the tight monetary policy the Federal Reserve started to implement in early 1928. They wrote:

This policy was carried out largely for one reason: to stem the rapid advance in stock prices. Officials at the Federal Reserve were convinced that a speculative frenzy was taking place on Wall Street, and they were especially concerned about member banks' role in providing the fuel by lending for stock market speculation.

When Franklin D. Roosevelt took office in 1933, he introduced the New Deal, a series of programs and policies aimed at reviving the American economy. The New Deal included measures such as the Civilian Conservation Corps (CCC), the Works Progress Administration (WPA), and the Social Security Act, among others. These programs aimed to reduce unemployment, provide relief to the poor, and reform the financial system.

Franklin Roosevelt sought to combat the Great Depression with his "New Deal"

The New Deal, however, had several unintended negative consequences. One of the primary critiques is that New Deal policies increased government intervention in the economy, creating uncertainty among investors and businesses. For instance, the National Industrial Recovery Act (NIRA) was an attempt to stabilize prices and wages through the creation of industry-wide codes. While well-intentioned, these regulations often resulted in higher prices and reduced production, discouraging business investment and hindering economic recovery.

Additionally, the Agricultural Adjustment Act (AAA), which aimed to raise crop prices by paying farmers to reduce production, led to the destruction of crops and livestock at a time when many Americans were going hungry. This policy, while increasing agricultural prices, also meant that fewer goods were available. In essence, the Federal government was paying farmers to destroy crops and limit how much food was available at the same time that millions of hungry Americans were standing in line at soup kitchens in hopes of a meager meal. Ostensibly the act was supposed to help poor farmers, who were suffering due to the collapse in prices of agricultural products, but in reality it was designed to benefit wealthy landowners with large holdings, not the poor farmers, and most especially not the approximately 1.5 million sharecroppers. M.S. Venkataramani wrote of this:

The contract proved to contain inadequate safeguards for the protection of the interests of non-landowning tenants. The tenant was not a party to the contract at all. It was left to the landlord to work out his own arrangements with his tenants… Obviously, security of tenure was not guaranteed in clear and unambiguous terms to the tenants. An unscrupulous landlord stood to gain financially if he could succeed in getting rid of some of his tenants or in reducing them to the status of wage hands.

A Shantytown in New York's Central Park during the Great Depression

Another nail in the coffin of the theory that the New Deal ended the Great Depression is the role of taxation. The New Deal was funded by higher taxes, including taxes on businesses and higher-income individuals. These taxes stifled entrepreneurship and investment. The Revenue Act of 1935, for example, raised taxes on incomes, estates, and gifts, which discouraged wealth creation and savings, further stalling economic recovery.

The reality that the Great Depression only ended with the advent of World War Two can be demonstrated by the observation that the war effort necessitated a massive mobilization of resources and labor, effectively solving the unemployment crisis. As the United States ramped up production of military equipment and supplies, factories reopened, and millions of Americans found employment in war-related industries. This period saw a dramatic increase in government spending, but, unlike the New Deal, this spending was directly tied to the production of goods and services that had immediate economic utility. This is in stark contrast to the poor mobilization that happened when the United States entered the First World War and had to purchase or borrow French or British weapons and equipment to a great extent. Thomas D. Morgan wrote of the year 1939: “The U.S. Army at that time totaled less than 190,000men and ranked seventeenth among the armies of the world, just behind the army of Rumania. In 1939 the Army Air Corps had 20,000 men and 1,700 mostly obsolete aircraft.” He goes on to demonstrate in his paper “The Industrial Mobilization of World War II: America Goes to War” that:

The United States became in a real sense the arsenal of democracy during World War II, producing about 40 percent of the world's total munitions during the crucial years 1943-44. The actual dollar expenditure of the U.S. government during the conflict was $337 billion… The automobile industry was the heart of American industry at the start of World War II. It was the greatest reservoir of technical and mechanical talent and inventive skill ever assembled. By the end of the war, it had produced 75 percent of the aircraft engines, more than one-third of all machine guns, 80 percent of all tanks and tank parts, 50 percent of all diesel engines, and 100 percent of the vehicles that motorized the Army. The greatest production success was in aircraft. In 1939 5,865 planes were produced; in 1944 aircraft production had risen to 96,318.

Industrial production in World War Two ramped up to unprecedented levels

World War Two also facilitated significant technological and industrial advancements. The demand for innovation in warfare led to improvements in manufacturing processes and technologies that would later benefit the civilian economy. For example, advancements in aviation, communications, and materials science during the war had peacetime applications that spurred post-war economic growth.

Moreover, the war effort effectively ended the policy experimentation and uncertainty that had characterized the New Deal years. With a clear and urgent focus on winning the war, both government and private industry were aligned towards a common goal, which restored confidence and stability to the economy.

The combination of flawed monetary policy, overregulation, and high taxation that came with Roosevelt’s New Deal created an environment of uncertainty and inefficiency that hindered economic recovery. It was only with the advent of World War Two, which necessitated a full-scale economic mobilization, that the United States was able to finally overcome the Depression.

The reality of the flaws inherent in the New Deal, for those who understand the reality of it, and not just the rose-tinted picture of some history textbooks, serves as a reminder of the complex interplay between government policy and economic performance. It underscores the importance of carefully considering the potential unintended consequences of well-intentioned policies. Ultimately, the Great Depression remains a sobering lesson in economic history, one that continues to inform debates on the role of government in the marketplace.

Works Cited:

Hall, Thomas E., and J. David Ferguson. “The Start of the Great Depression, 1929–30.” In The Great Depression: An International Disaster of Perverse Economic Policies, 63–74. University of Michigan Press, 1998.

http://www.jstor.org/stable/10.3998/mpub.11061.9.

Morgan, Thomas D. “The Industrial Mobilization of World War II: America Goes to War.” Army History, no. 30 (1994): 31–35. http://www.jstor.org/stable/26304207.

Venkataramani, M. S. “Norman Thomas, Arkansas Sharecroppers, and the Roosevelt Agricultural Policies, 1933-1937.” The Arkansas Historical Quarterly 24, no. 1 (1965): 3–28. https://doi.org/10.2307/40023962.