Bursting the Myths of the Great Depression

Bursting the Myths of the Great Depression
by George C. Leef, Posted May 25, 2010

The Politically Incorrect Guide to the Great Depression and the New Deal
by Robert P. Murphy (Regnery, 2009); 272 pages.

Government of all kind depends on elaborate mythologies to keep the people complacent in the face of constant attacks on their liberty, their property, and even their lives. Kings used to proclaim that they were divine or at least that they ruled with divine approval, so disobedience to them was actually disobedience to God or the gods. That worked to keep most of the citizenry in line for a very long time.

As religion started losing its hold over people, rulers came up with new ideas. One was that the state was like a big, sheltering family where everyone had to cooperate for the common good — as directed by the government. Another idea was that the alternative to control by the government, anarchy, was so terrifying that it must be opposed at every turn. Government, according to this notion, is our bulwark against many calamities, including economic implosion. If it weren’t for the benevolent, far-seeing actions of politicians and their hired regulators, we would have to endure repeated and prolonged depressions. So even if you aren’t crazy about everything the government does, you need to accept it because the alternative is so much worse.

The argument that we need the government to stabilize and stimulate the economy came to the forefront during the 1930s and it’s there once again following the bursting of the housing bubble and the stock-market collapse in 2007-08. People who never think the state has too much power are beating the drums and hollering that these events once again prove the need for government to have a tight — tighter — grip on the economic reins. Numerous articles and books have been written on the wisdom we can gain by looking back in history at the Great Depression and President Roosevelt’s New Deal. The message they convey is that laissez-faire capitalism causes depressions and we must rely on activist government for salvation.

Economist Robert Murphy (Ph.D. from New York University, formerly on the faculty of Hillsdale College and now an independent scholar) agrees that we can learn a lot by looking back at the Great Depression and New Deal, but maintains that the lessons to be learned are the exact opposite of those that our political establishment (including its many intellectual hangers-on) want us to learn. Far from proving any defect in capitalism, the Depression actually shows that politicians should refrain from political meddling with the economy, especially federal tampering with money and credit. Also, if we hunt for the truth about the New Deal, we discover that it was just a parade of endless folly and bungling that made things worse.

Murphy puts it this way:

More and more economists and historians are beginning to realize that the corrupt politicians who manage to waste our money today were not wizards of efficiency in the 1930s. Some things remain the same: politicians and bureaucrats have always been incompetent and venal when they’ve chosen to intervene in the economy.

Oh, oh. If that idea were to become widely accepted, support for much of what the federal and state governments do would turn into hostility. That is exactly what Murphy is trying to accomplish with a book that is aimed at the everyday reader, easy to read, and free of jargon. The political scoundrels would love to keep this book out of people’s hands.


The real culprit

Most Americans have been taught that the Depression occurred because capitalists produced too much and underpaid their workers, because greedy speculators produced a stock-market bubble, because the country was stuck with the antiquated and inflexible gold standard, or some combination of those ideas. Murphy adduces strong arguments and evidence to show that those notions are entirely false. The natural stability that comes from millions of market participants acting in accordance with the price system’s signals was thrown out of kilter by Federal Reserve policies in the late 1920s. The Fed engineered artificially low interest rates then, just as it did at the beginning of our recent housing bubble. Artificially low interest rates, Murphy shows, cause people to make bad business investment decisions. That was what precipitated the boom and subsequent crash. Blame government, not capitalism.

And the gold standard? Murphy gives his readers a clear explanation of just how the gold standard worked in favor of overall price stability, economic growth, and trade. The seeds of disaster were planted, he shows, when European governments went off the gold standard to pay for the stupendous costs of World War I with blizzards of paper money. The gold standard was a pillar of economic stability. It was done in by politicians who couldn’t abide its restraints. Herbert Hoover

Americans have also been told that the Depression wouldn’t have been so bad if it hadn’t been for Herbert Hoover’s dogged insistence on letting the free market correct itself. But that idea, Murphy demonstrates, is also utterly false. Hoover was thoroughly committed to “progressive” policies he felt would put the economy back on its feet. Especially revealing is Murphy’s recounting of the fact that back in the Harding administration (1921-23) Hoover had argued in favor of government “stimulus” and interventionism. Fortunately, President Harding listened instead to Treasury Secretary Andrew Mellon, who argued for federal budget and tax cuts to help speed recovery, but otherwise not to tinker with the economy. Under Mellon’s approach, the economy quickly rebounded from its sharp postwar slump. Hoover, however, remained devoted to his belief that recessions call for more government intervention, not less.

Once the stock market crashed in 1929 and unemployment rose, Hoover (who had been elected president in 1928) rejected the counsel of Mellon and others who urged him to follow the same course Harding had. He was certain that it would be more effective and humane for the federal government to step in and override the slow and “cruel” free-market adjustment process. By embracing an activist approach, Hoover managed to convert what would have been a short recession into America’s worst depression.

Hoover was voted out of office in disgrace in the 1932 election, but to his dying day he remained adamant that his activist, “progressive” economic policy was right.


Franklin Roosevelt

His successor in the White House was Franklin D. Roosevelt, and that brings us to another myth, probably the most widespread and pernicious of all, namely that Roosevelt’s New Deal worked to bring the country out of the Depression. On the contrary, Murphy shows, the New Deal was just Hooverism taken to new, often absurd heights, and it merely deepened the country’s economic woes.

For example, Roosevelt and his “Brain Trust” of pro-socialist intellectuals promulgated the policy of forcing farmers to destroy crops at a time when many people were going hungry. Roosevelt, an arrogant and economically illiterate man, had become convinced that high agricultural prices were the key to restoring prosperity. He was wrong, but as usual, it wasn’t the politicians who paid the cost of their blunders. It was “the little guy” they claimed to be protecting from the ravages of capitalism.

Not only did Roosevelt’s New Deal prolong and deepen the Depression, but it also brought something new and ugly to America — bullying government regulators who could ruin ordinary people who just wanted to peacefully go about their business. Murphy’s chapter “The Outrages of the New Deal” should make any reader with an ounce of moral sense angry. Roosevelt’s gold seizure, his bureaucratic attacks on farmers and businessmen, his abuse of legal processes to harass those who dared to disagree with him, and many more instances will have the reader thinking, “Roosevelt was not a great president; he was a despicable failure!”

As an added bonus, Murphy includes a chapter to refute the notion common among conservatives that what truly ended the Depression was not the New Deal, but rather American participation in World War II. He shows that this misconception is rooted in Bastiat’s “broken-window fallacy.” That is, it depends on people’s focusing only on what is apparent (in this case, lower unemployment) and missing what is not apparent (that labor and materials were being devoted to military purposes and therefore were not available to produce goods people wanted to consume). The Depression ended only after the war was over and most economic controls were ended.

This book isn’t just about history. It is extraordinarily pertinent to our current political and economic circumstances. Once again, the federal government’s blundering has gotten the country into a severe recession, and once again Americans have elected a president who believes in the same statist lunacy that Hoover and Roosevelt did. Americans are being told that the only way back to prosperity is to greatly increase the size and scope of government. That was a disaster in the 1930s and it will be a disaster today if Americans fall for the lies that capitalism is the villain and government is their protector.

Thanks to Bob Murphy and Regnery Publishing for their efforts at telling them the truth.

George C. Leef is the director of the Pope Center for Higher Education Policy in Raleigh, North Carolina, and book review editor of The Freeman. Send him email

This article originally appeared in the February 2010 edition of Freedom Daily. Subscribe to the print or email version of Freedom Daily.