All Commentary
Friday, February 2, 2018

What Caused the Great Depression?

The definitive guide to the key events and policies that caused the Great Depression.

Few areas of historical research have provoked such intensive study as the causes of America’s Great Depression—and for good reason. Tens of millions of humans suffered intense misery and despair.

How bad was the Great Depression? The dimensions of the economic catastrophe in America and the rest of the world cannot be captured fully by quantitative data alone, but here are some figures that might help put this economic nightmare into perspective:

  • From 1929–1933, production at the nation’s factories, mines, and utilities fell by more than half.
  • People’s real disposable incomes dropped 28%.
  • 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.
  • At the height of the Depression, one of every four workers was out of a job.

Because of these unspeakable traumas, the Great Depression and its causes have remained at the forefront of economic study and debate. The Great Depression was a complex event, and understanding what happened is no small challenge. In this guide, we aim to give you a clear picture of the key historical figures, policies, and events that caused and extended America’s Great Depression.

We’ll start by breaking down the timeline of how exactly the Depression unfolded, which we’ll break up into into four distinct phases.

The Four Phases of the Great Depression

When you think of the Great Depression, probably the first thing that comes to mind is the massive stock market crash of 1929, when stock prices plummeted spectacularly and investors dumped their stocks as fast as they could. The ensuing panic was memorable indeed, but it was only one aspect of the Depression. In fact, the Depression had four distinct phases:

  1. The government’s “easy money” policies caused an artificial economic boom and a subsequent crash.
  2. President Herbert Hoover’s interventionist policies after the crash suppressed the self-adjusting aspect of the market, thus preventing recovery and prolonging the recession.
  3. After Hoover left office, Franklin Delano Roosevelt’s “New Deal” expanded Hoover’s interventionism into nearly every aspect of the American economy, thus deepening the Depression and extending it ever longer.
  4. Labor laws such as the Wagner Act struck the final blow to the remaining healthy sectors of the economy, dragging the last remaining bulwarks of productivity to their knees.

Each of these phases are marked by distinct events, and each had their own specific causes. Together they produced one common result: business stagnation and unemployment on a scale never before seen in the United States. Let’s examine each phase and its causes in turn.

1. Easy Money: A Series of False Signals

The first phase of the Great Depression was a massive boom during the “Roaring 20’s,” which inevitably burst in 1929. In order to understand this crash, we first have to understand the boom and how it happened.

For various reasons, the government in the 1920’s created monetary policies that ballooned the quantity of money and credit in the economy. A great boom resulted, followed soon after by a painful day of reckoning. None of America’s depressions prior to 1929, however, lasted more than four years and most of them were over in two. The Great Depression lasted for a dozen years because the government compounded its monetary errors with a series of harmful interventions. But how exactly did the government inflate the economy, and how did that cause the boom and inevitable bust?

Monetary Policy, Interest Rates, and the Business Cycle

The key to understanding how the government’s policies caused the initial boom and bust of the Great Depression lies in understanding how businessmen and investors use interest rates to decide how and when to spend their money.

Investors rely on interest rates to gauge the level of risk for various investments. In simplistic terms, a relatively low interest rate for a given loan signals to potential investors that taking out the loan is probably a safe bet; a high interest rate, on the other hand, signals to investors that money can bet better invested elsewhere. The government’s ex­pansion of the money supply artificially reduces and thus falsifies the interest rates, and thereby misguides businessmen in their investment decisions.

The government’s ex­pansion of the money supply artificially reduces and thus falsifies interest rates.In the belief that declining rates indi­cate growing supplies of capital savings, investors embark upon new production projects. The creation of money gives rise to an economic boom. It causes prices to rise, es­pecially prices of capital goods used for business expansion.

The costs of capital goods used for business expansion soar ever higher until business is no longer profitable. It is at this point that the decline begins. In order to pro­long the boom, the monetary au­thorities may continue to inject new money until finally, frightened by the prospects of a run-away in­flation, they being to contract the money supply. The boom that was built on the quicksand of inflation then comes to a sudden end.

The ensuing recession is a period of repair and readjustment. Prices and costs adjust anew to consumer choices and preferences.

Most importantly, interest rates read­just to reflect once more the actual supply of and demand deposits in savings. The malinvest­ments are abandoned or written down. Business costs are reduced through through various means until busi­ness can once more be profitably conducted, capital investments earn interest, and the market econ­omy functions smoothly again.

Changes in the supply of money in the economy do have an effect on economic activity. This effect works through the fluctuations of interest rates, which in turn cause fluctuations in business activity.

When money is provided to the market in the form of credit expansion through the banking system, business firms erroneously view this as an increase in the supply of capital. Due to the decreased interest rate in the loan market brought about by the fictitious “increase” in capital, businesses increase their investments in long-range projects that appear profitable.

In addition, other factors as well can cause a discrepancy between the natural rate of interest and the rate which is paid in the loan market. Government policies with regard to debt creation, monetization, bank deposit guarantees, and taxation, can effectively externalize the risk associated with running budget deficits, thus artificially lowering loan rates in the market.

Either of these two influences on interest rates, or a combination of the two, can and do influence economic activity by inducing businesses to make investments that would otherwise not be made. Since real savings in the economy, however, do not increase due to these interventionist measures, there is no real money for businesses to finance the supplies and workers needed for production and growth. And thus the business boom must ultimately give way to a bust.

The Artificial Boom of the Roaring 20’s

Now that you can see how manipulations of interest rates and money supply can affect the economy, we can take a look at the boom and bust business cycle leading up to the Great Depression.

The spectacular crash of 1929 followed five years of significant credit expansion by the Federal Reserve System under the Cool­idge Administration. In 1924, after a sharp decline in business, the Reserve banks suddenly cre­ated some $500 million in new credit, which led to a bank credit expansion of over $4 billion in less than one year.

While the im­mediate effects of this new power­ful expansion of the nation’s money and credit were seemingly beneficial, initiating a new eco­nomic boom and effacing a 1924 decline, the ultimate outcome was most disastrous. It was the begin­ning of a monetary policy that led to the stock market crash in 1929 and the following depression.

Signifiant credit expansion under the Coolidge Administration was the begin­ning of a monetary policy that led to the crash in 1929.

The Federal Reserve System launched a further burst of infla­tion in 1927, the result being that total currency outside banks plus demand and time deposits in the United States increased from $44.51 billion at the end of June, 1924, to $55.17 billion in 1929. The volume of farm and urban mortgages expanded from $16.8 billion in 1921 to $27.1 billion in 1929.

Similar increases occurred in industrial, financial, and state and local government indebted­ness. This expansion of money and credit was accompanied by rapidly rising real estate and stock prices. Prices for industrial securities, according to Standard & Poor’s common stock index, rose from 59.4 in June of 1922 to 195.2 in September of 1929. Railroad stock climbed from 189.2 to 446.0, while public utilities rose from 82.0 to 375.

The flood of easy money drove interest rates down, pushed the stock market to dizzy heights, and thus gave birth to the “Roaring Twenties.”

The Inevitable Bust

As the boom matured, business costs rose, interest rates began to readjust upward, and profits began to fall. The easy-money effects of the expansion wore off, and the monetary authorities, fearing price inflation, slowed the growth of the money supply. The manipulation was enough to knock out the shaky supports from underneath the economic house of cards.

After a failed attempt at stabilization in 1928, the Federal Reserve System finally abandoned its easy money policy at the beginning of 1929. It sold government securities and thereby halted the bank credit ex­pansion. It raised its discount rate to 6% in August, 1929. Time-money rates rose to 8%, commercial paper rates to 6%, and call rates to the panic figures of 15% and 20%. The American economy was beginning to readjust to fair value levels. In June, 1929, business activity began to recede. Commodity prices began their retreat in July.

The security market reached its high on September 19 and then, under the pressure of early selling, slowly began to decline. For five more weeks the public nevertheless bought heavily on the way down. More than 100 million shares were traded at the New York Stock Exchange in September. Finally it dawned upon more and more stockholders that the trend had changed.

The deflation following the inflation wrenched the economy from tremendous boom to colossal bust.

By early 1929, the Federal Reserve was taking the punch away from the party. It choked off the money supply, raised interest rates, and for the next three years presided over a money supply that shrank by 30%. This deflation following the inflation wrenched the economy from tremendous boom to colossal bust.

Only the sharpest financers saw that the party was coming to an end before most other Americans did. Some even began selling stocks and buying bonds and gold as early as 1928. As Joseph Kennedy said, “only a fool holds out for the top dollar.”

When the masses of investors caught up with forward-looking financers like Kennedy, they sensed the change in Fed policy, and the stampede was underway. The stock market, after nearly two months of moderate decline, plunged on “Black Thursday”—October 24, 1929—as the pessimistic view of large and knowledgeable investors spread.

After the crash in 29, the masses rushed on the banks to withdraw their money. The pressure on banks was great and tended not to decrease with the passage of time. In 1929, 659 banks failed; in 1930, 1,352; in 1931, 2,294, and in 1932, 1,456.

2. Hoover’s Anti-Adjustment Policies

We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and the Congress of the most gigantic program of economic defense and counter attack ever evolved in the history of the Republic. —Herbert Hoover

If this crash had been like previous ones, the subsequent hard times might have ended in a year or two. But unprecedented political bungling, starting with the policies of President Herbert Hoover, prolonged the misery for twelve long years.

Unemployment in 1930 averaged a mildly recessionary 8.9%, up from 3.2% in 1929. It shot up rapidly until peaking out at more than 25% in 1933. Until March 1933, these were the years of President Herbert Hoover.

Hoover’s interventionist policies prevented the natural readjustment of the market.

But, as we’ll see, Hoover’s interventionist policies prevented the natural readjustment of the market. He not only signed the Smoot-Hawley Tariff, which we’ll cover in the next section, but also encouraged businessmen to artificially prop up wages, expanded government spending, set up all manner of government lending facilities, and increased the budget deficit. Along with the Federal Reserve System’s failure to do its job, resulting in a 30% drop in the money supply, Hoover’s interventions were responsible for turning what might have been a severe but swift recession into the Great Depression.

The Smoot-Hawley Tariff Act

The Hoover administration passed the Smoot-Hawley Tariff in June 1930. The most protectionist legislation in U.S. history, Smoot-Hawley aimed to prop up prices in the American economy by keeping foreign products out.

The Act raised American tariffs to unprecedented levels, which practically closed our borders to foreign goods. According to most economic historians, this was the crowning folly of the whole period from 1920 to 1933 and the begin­ning of the real depression.

“Once we raised our tariffs,” wrote Ben­jamin Anderson,

an irresistible movement all over the world to raise tariffs and to erect other trade barriers, including quotas, began. Protectionism ran wild over the world. Markets were cut off. Trade lines were narrowed. Unemployment in the export in­dustries all over the world grew with great rapidity. Farm prices in the United States dropped sharply through the whole of 1930, but the most rapid rate of decline came following the passage of the tariff bill.

Officials in the administration and in Congress believed that raising trade barriers would force Americans to buy more goods made at home, which would solve the nagging unemployment problem. They ignored an important principle of international commerce: trade is ultimately a two-way street; if foreigners cannot sell their goods here, then they cannot earn the dollars they need to buy here.

Foreign companies and their workers were flattened by Smoot-Hawley’s steep tariff rates.

Foreign companies and their workers were flattened by Smoot-Hawley’s steep tariff rates, and foreign governments soon retaliated with trade barriers of their own. With their ability to sell in the American market severely hampered, they curtailed their purchases of American goods.

American agriculture was particularly hard hit. With a stroke of the presidential pen, farmers in this country lost nearly a third of their markets. Farm prices plummeted and tens of thousands of farmers went bankrupt. With the collapse of agriculture, rural banks failed in record numbers, dragging down hundreds of thousands of their customers.

Agricultural commodity prices, which had been well above the 1926 base before the crisis, dropped to a low of 47 in the sum­mer of 1932. Crashing prices plunged hundreds of thousands of farmers into bank­ruptcy. Farm mortgages were foreclosed until various states passed moratoria laws, thus shift­ing the bankruptcy to countless creditors.

American exports fell from $5.5 billion in 1929 to $1.7 billion in 1932. American agriculture cus­tomarily had exported over 20% of its wheat, 55% of its cotton, 40% of its to­bacco and lard, and many other products. When international trade and commerce were disrupted, American farming collapsed. In fact, the rapidly growing trade restrictions, including tariffs, quotas, foreign exchange controls, and other devices were generating a world-wide depression.

Hoover’s Taxes, Subsidies, and Relief Schemes

Hoover dramatically increased government spending for subsidy and relief schemes. In the space of one year alone, from 1930 to 1931, the federal government’s share of GNP increased by about one-third.

President Hoover called together the nation’s in­dustrial leaders and pledged them to adopt his program to maintain wage rates and expand construc­tion. He sent a telegram to all the governors, urging cooperative ex­pansion of all public works pro­grams. He expanded Federal pub­lic works and granted subsidies to ship construction.

And for the benefit of the suffering farmers, a host of Federal agencies embarked upon price stabilization policies that generated ever larger crops and surpluses which in turn de­pressed product prices even fur­ther. Economic conditions went from bad to worse and unemploy­ment in 1932 averaged 12.4 mil­lion.

In this dark hour of human want and suffering, the Federal government struck a final blow. The Revenue Act of 1932 doubled the income tax, the sharpest in­crease in the Federal tax burden in American history. Under the new Revenue Act:

  • Tax exemptions were lowered.
  • “Earned income credit” was eliminated.
  • Normal tax rates were raised from a range of 1.5% to 5% to a range of 4% to 8%.
  • Surtax rates were raised from 20% to a maximum of 55%.
  • Corporation tax rates were boosted from 12% to 13.75 and 14.5%.
  • Estate taxes were raised.
  • Gift taxes were imposed with rates from .75 to 33.5%.

On top of all these, a 10% gasoline tax was imposed, a 3% automo­bile tax, a telegraph and telephone tax, a 2¢ check tax, and many other excise taxes. And, finally, postal rates were increased sub­stantially.

When state and local govern­ments faced shrinking revenues, they, too, joined the Federal gov­ernment in imposing new levies. The rate schedules of existing taxes on income and business were increased and new taxes imposed on business income, property, sales, tobacco, liquor, and other products.

Murray Rothbard, in his author­itative work on America’s Great Depression (Van Nostrand, 1963), estimates that the fiscal burden of Federal, state, and local govern­ments nearly doubled during the period, rising from 16% of net private product to 29%. This blow alone would bring any economy to its knees.

3. The New Deal: FDR’s Interventionism

Soon after Herbert Hoover assumed the presidency in 1929, the economy began to decline, and between 1930 and 1933 the contraction assumed catastrophic proportions never experienced before or since in the United States. Disgusted by Hoover’s inability to stem the collapse, in 1932 the voters elected Franklin Delano Roosevelt, along with a heavily Democratic Congress, and set in motion the radical restructuring of government’s role in the economy known as the New Deal.

Roosevelt was undeterred by the failure of the Hoover programs to achieve their object. So far as they considered them in that light at all, the New Dealers thought the Hoover effort was too timid and much too piecemeal. In any case, they were much more convinced of the healing powers of monetary inflation than Hoover had been.

The most prominent of the New Deal programs were supposed to deal with economic problems arising from the Great Depression. Most of them were put forward as remedies for depression-related conditions, many of them in an emergency atmosphere. But rather than cure the depression, they plunged it to new depths.

The New Deal’s Central Planning: NRA and AAA

One of the great attributes of the private-property market sys­tem is its inherent ability to over­come almost any obstacle. Through price and cost readjustment, man­agerial efficiency and labor pro­ductivity, new savings and invest­ments, the market economy tends to regain its equilibrium and re­sume its service to consumers. It doubtless would have recovered in short order from the Hoover in­terventions had there been no fur­ther tampering.

However, when President Franklin Delano Roosevelt as­sumed the Presidency, he, too, fought the economy all the way. Instead of clearing away the prosperity bar­riers erected by his predecessor, he built new ones of his own. He struck in every known way at the integrity of the U.S. dollar through monetary expansion schemes. He seized the people’s gold holdings and subsequently devalued the dollar by 40%.

With some third of industrial workers unemployed, President Roosevelt embarked upon sweep­ing industrial reorganization. He persuaded Congress to pass the National Industrial Recovery Act (NIRA), which set up the Na­tional Recovery Administration (NRA).

Roosevelt persuaded Congress to pass the National Industrial Recovery Act (NIRA), which set up the Na­tional Recovery Administration (NRA).

The professed purpose of the NRA was to get business to regulate itself, ignor­ing the antitrust laws and develop­ing fair codes of prices, wages, hours, and working conditions. The President’s Re-employment Agreement called for a minimum wage of 400 an hour ($12 to $15 a week in smaller communities), a 35-hour work week for industrial workers and 40 hours for white collar workers, and a ban on all youth labor.

This was a naive attempt at “in­creasing purchasing power” by in­creasing payrolls. But, the im­mense increase in business costs through shorter hours and higher wage rates worked naturally as an anti revival measure. After passage of the Act, unemployment rose to nearly 13 million. The South, especially, suffered severely from the minimum wage provi­sions: the Act forced 500,000 Blacks out of work.

These Na­tional Recovery Administration codes were typically concerned with restricting competition within an industry, reducing hours of labor, and raising prices and wages. Employers were usually forbidden to employ children under 16 years old. A minimum wage throughout the industry and a work week of 40 hours were ordinarily specified. Further, the Cotton Textile Code, for example, forbade employers to use “productive machinery in the cotton textile industry for more than two shifts of 40 hours per week.” Planning was supposed to be accomplished by the companies and workers acting in concert with government.

Nor was it simply major industries that were governed by codes initially; any and every sort of undertaking was included.

  • Code 450 regulated the Dog Food Industry
  • Code 427regulated the Curled Hair Manufacturing Industry and Horse Hair Dressing Industry
  • Code 262 regulated the Shoulder Pad Manufacturing Industry.

In New York, I. ‘Izzy’ Herk, executive secretary of Code 348, brought order to the Burlesque Theatrical Industry by insisting that no production could feature more than four strips.

President Roosevelt also attempted to address the disaster that had be­fallen American agriculture. He attacked the problem by passage of the Farm Relief and Inflation Act, popularly known as the First Agricultural Adjustment Act (AAA).

The objective was to raise farm in­come by cutting the acreages planted or destroying the crops in the field, paying the farmers not to plant anything, and organizing marketing agreements to improve distribution. The program soon covered not only cotton, but also all basic cereal and meat produc­tion as well as principal cash crops. The enormous costs of the pro­gram were to be covered by a new “processing tax” levied on an al­ready depressed industry.

The AAA was expected to do for agriculture much the same sort of thing that NRA would for industry, only more. Farmers were reckoned to be in much worse condition than manufacturers and industrial workers. The first task with them, according to the planners, was to bring farm income up to a “parity” (as it was called) with industrial income.

The AAA was expected to do for agriculture much the same sort of thing that NRA would for industry, only more.

The years 1909-1914 were chosen as a base for most farm staple products, and the aim was to raise farm prices to a level that would give them an income equivalent to the ratio between farm and industry that prevailed in the base period.

The main device for accomplishing this was reduction of production of staples. So dramatic was the need for reduction, New Dealers thought, that a considerable portion of the 1933 cotton crop was plowed up and destroyed, and many small pigs put to death.

Thereafter, farmers were induced to plant less by government subsidies for those who “cooperated.” Under the first AAA (1933–1936), the money to pay for the various benefits paid to farmers came from a tax on processors. Many farmers had long believed, of course, that the middlemen got the profits from their endeavors. The New Deal gave this spurious notion legal standing by levying the tax.

NRA codes and AAA processing taxes came in July and August of 1933. Again, economic production which had flurried briefly before the deadlines, sharply turned downward. The Federal Reserve index dropped from 100 in July to 72 in November of 1933.

The thrust of the NRA and AAA was in the opposite direction from what was needed. If people have material needs, are unemployed or underemployed, the solution for them is either to produce for themselves what they need or produce for sale in the market enough of what is wanted to be able to buy what they need. These things require more, not less, production and changes in production activities, not the freezing of them into patterns of the past.

The thrust of the NRA and AAA was in the opposite direction from what was needed.

That is not to say that government would have had greater success in planning increased production. Some things were already being produced in greater quantities than could be profitably produced for the market. Any general effort to solve the problem was doomed to failure, for the problem was one of individuals, families, and other producing units. Only they could solve it.

The Supreme Court, by unanimous decision, outlawed NRA in 1935 and AAA in 1936. The Court maintained that the Federal legislative power had been unconstitutionally delegated and states’ rights violated. These two decisions removed some fearful handicaps under which the economy was laboring.

The NRA in particular was a night­mare with continuously changing rules and regulations by a host of government bureaus. Above all, voidance of the act immediately reduced labor costs and raised productivity as it permitted labor markets to adjust. The death of AAA reduced the tax burden of agriculture and halted the shock­ing destruction of crops. Unem­ployment began to decline. In 1935 it dropped to 9.5 million, or 18.4% of the labor force, and in 1936 to only 7.6 million, or 14.5%.

Inflation and Pump-Priming Measures

When the economic planners saw their plans go wrong, they simply prescribed additional doses of Fed­eral pump priming. In his January 1934 Budget Message, Mr. Roose­velt promised expenditures of $10 billion while revenues were at $3 billion. Yet, the economy failed to revive; the business index rose to 86 in May of 1934, and then turned down again to 71 by Sep­tember. Furthermore, the spend­ing program caused a panic in the bond market which cast new doubts on American money and banking.

The New Dealers held generally that the depression was caused by a shortage of purchasing power, or, at the least, a shortage in the hands of those who would spend it. In the most obvious sense, there was some sort of shortage of purchasing power by those who had great difficulty in providing for their most direct wants.

That is, there was food, clothing, shoes, and other goods available in stores. Yet, many people had to resort to charitable aid to get the wherewithal to live. Surely, they lacked the purchasing power to buy the goods.

They did not lack money—money, per se, is not purchasing power. Money is a medium of exchange. It is, then, a medium through which purchasing power is exercised.

A shortage of purchasing power is not a shortage of money—it’s a shortage of goods.

The idea that pumping new money stimulates the economy stems from the idea that money itself is what gives people purchasing power. The problem is that purchasing power is not merely money; it is, in fact, real goods or services. Ultimately, all exchanges are of goods for goods. In a money economy, goods are exchanged for money, and money is then exchanged for other goods. A shortage of purchasing power, then, is in fact a shortage of goods.

Operating on the idea that purchasing power is money, the New Dealers simply printed more money in the hopes of restoring purchasing power to the underemployed masses. But this policy amounts to a trade in which money is exchanged not for goods, but for nothing at all.

The problem is that trading with a shortage of goods is not a normal market phenomenon at all. It occurs only as a result of a large scale intervention in the market through credit expansion fueled by debt; this process is known as inflation. Monetized debt, or inflation,  is based not on trading goods for goods, but on trading goods for the promise of goods that don’t exist yet, but will be produced in the future. It is nothing other than a promise of future production.

Flooding the economy with money that has not been traded for real goods introduces a whole set of temporary imbalances in the economy. There is a trade imbalance because the goods to be traded for other goods have not yet been produced. There is a price imbalance because prices are no longer in proportion to the money supply. There is a shortfall of real purchasing power (i.e., goods and services). In the wake of the credit expansion there will be an imbalance of production, for many producers will be induced to increase their production, and even their facilities for production, for there are many willing buyers with the money, it seems, to pay for their wares.

The imbalances resulting from any single monetary expansion, however large, will be only temporary. The market tends always toward balance, and if people are free to operate the market, balance will be restored. Prices will rise to compensate for the increase in the money supply. People will generally pay their debts out of production, if they can, and the trade imbalance will be restored.

However, at this stage the shortage of purchasing which was there at the outset will become obvious. Much of production must go into repaying debts. Moreover, even when the debts are repaid, there may need to be a further interval for savings to be made before many new purchases can be made. Many plants may lie idle, and there will be a depression. The adjustments that must be made to restore the balance are often difficult and unpleasant.

The impact of all these multitudinous measures – industrial, agricultural, financial, monetary, and other – upon a bewildered in­dustrial and financial community was extraordinarily heavy. We must add the effect of continuing disquieting utterances by the President. He had castigated the bankers in his inaugural speech. He had made a slurring compari­son of British and American bank­ers in a speech in the summer of 1934… That private enterprise could survive and rally in the midst of so great a disorder is an amazing demonstration of the vi­tality of private enterprise. —Benjamin Ander­son

4. The Wagner Act and Labor Laws

The third phase of the Great Depression was thus drawing to a close. But there was little time to rejoice, for the scene was being set for another collapse in 1937 and a lingering depression that lasted until the day of Pearl Har­bor. More than 10 million Ameri­cans were unemployed in 1938, and more than 9 million in 1939.

The Wagner Act of July 5, 1935, radically changed American employment and business. It took legal employer-employee disputes over labor contracts out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board fur­ther perverted the law that al­ready afforded legal immunities and privileges to labor unions. The U. S. thereby abandoned a great achievement of Western civiliza­tion, equality under the law.

The Wagner Act, or National Labor Relations Act (NLRA), was passed in reaction to the Supreme Court’s voidance of NRA and its labor codes. It aimed at crushing all em­ployer resistance to labor unions. Any legal defense from an employer became an “unfair labor practice” punishable by the Board. The law not only obliged employers to deal and bargain with the unions designated as the employees’ representative; later Board decisions also made it un­lawful to resist the demands of labor union leaders.

The NLRA enabled unions to extort higher wages from employers than they could have received in the market.

The NRLA placed the power of government behind the organization of labor unions, mainly by way of the National Labor Relations Board, weighted the legal scales in favor of unions, and signaled a determination by the federal government that unions should prevail. Thereby, unions were able to extort higher wages from employers than they could have received in the market. The differential is a redistribution of wealth from employers to employees.

Following the election of 1936, the labor unions began to make ample use of their new powers. Through threats, boycotts, strikes, seizures of plants, and outright violence committed in legal sanc­tity, they forced millions of work­ers into membership. Conse­quently, labor productivity de­clined and yet wages were forced up­ward. Labor strife and disturb­ance ran wild. Ugly sit down strikes idled hundreds of plants. In the ensuing months economic activity began to decline and un­employment again rose above the ten million mark.

From the White House on the heels of the Wagner Act came a thunderous barrage of insults against business. Businessmen, Roosevelt fumed, were obstacles on the road to recovery. New strictures on the stock market were imposed. A tax on corporate retained earnings, called the “undistributed profits tax,” was levied.

The relentless assaults of the Roosevelt administration against business, property, and free enterprise guaranteed that the capital needed to jumpstart the economy was either taxed away or forced into hiding. When Roosevelt took America to war in 1941, he eased up on his anti-business agenda, but a great deal of the nation’s capital was diverted into the war effort instead of into plant expansion or consumer goods.

Not until both Roosevelt and the war were gone did investors feel confident enough to “set in motion the postwar investment boom that powered the economy’s return to sustained prosperity.”


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 important, 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.

In the final analysis, 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. 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.