LESSONS FROM THE GREAT DEPRESSION
November 18, 2005
The economic policies of the 1930s are a continuing source of myth and confusion; many people believe capitalism caused the Great Depression and that President Franklin Roosevelt's New Deal helped to end it, but the truth is that misguided federal policies prevented the economy from fully recovering for over a decade, says the Cato Institute.
The events of the 1930s prove that activist polices increase, not decrease, economic instability and that government intervention reduces the flexibility that markets need to adjust to shocks and return to growth, says Cato. Thus, the Great Depression provides great examples of the worst policy failures in the United States' history:
- The Depression was precipitated by a one-third drop in the money supply from 1929 to 1933, which was mainly the fault of the Federal Reserve; but the main problem was that most states restricted bank branching, which prevented banks from diversifying their portfolios across jurisdictions.
- President Roosevelt imposed further individual and corporate tax increases, killing incentives for work, investment and entrepreneurship at a time when they were sorely needed.
- Most farm subsidies went to major land owners, not small-time farmers, required reductions in farm acreage devastated poor sharecroppers and efforts to keep farm prices high led to the destruction of food while millions of families went hungry.
- Compulsory unionism led to discrimination against blacks because it gave monopoly power to union bosses who often didn't want them hired.
- National Industrial Recovery Act (NIRA) cartels prevented entrepreneurs from cutting prices for consumers.
Roosevelt's New Deal worked politically, but economically, each intervention failed, making the Great Depression an avoidable disaster, says Cato.
Source: Chris Edwards, "The Government and the Great Depression," Cato Institute: Tax and Budget Bulletin, No. 25, September 2005.
Browse more articles on Economic Issues