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Volume 13, Number 2
How FDR Made the Depression Worse
Franklin Roosevelt "did bring us out of the Depression," Newt Gingrich told a group of
Republicans after the recent election, and that makes FDR "the greatest figure of the 20th
century." As political rhetoric, the statement is likely to come from someone who does not
support a market economy. The New Deal, after all, was the largest peacetime expansion of
federal government power in this century. Moreover, Gingrich's view that FDR saved us from the
Depression is indefensible; Roosevelt's policies prolonged and deepened it.
There's no doubt that Roosevelt changed the character of the American government--for the
worse. Many of the reforms of the 1930s remain embedded in policy today: acreage allotments,
price supports and marketing controls in agriculture, extensive regulation of private securities,
federal intrusion into union-management relations, government lending and insurance activities,
the minimum wage, national unemployment insurance, Social Security and welfare payments,
production and sale of electrical power by the federal government, fiat money--the list goes on.
Roosevelt's revolution began with his inaugural address, which left no doubt about his
to seize the moment and harness it to his purposes. Best remembered for its patently false line
that "the only thing we have to fear is fear itself," it also called for extraordinary emergency
The day after FDR took the oath of office, he issued a proclamation calling Congress into a
special session. Before it met, he proclaimed a national banking holiday--an action he had
refused to endorse when Hoover suggested it three days earlier.
Invoking the Trading with the Enemy Act of 1917, Roosevelt declared that "all banking
transactions shall be suspended." Banks were permitted to reopen only after case-by-case
inspection and approval by the government, a procedure that dragged on for months. This action
heightened the public's sense of crisis and allowed him to ignore traditional restraints on the
power of the central government.
In their understanding of the Depression, Roosevelt and his economic advisers had cause and
effect reversed. They did not recognize that prices had fallen because of the Depression. They
believed that the Depression prevailed because prices had fallen. The obvious remedy, then, was
to raise prices, which they decided to do by creating artificial shortages. Hence arose a collection
of crackpot policies designed to cure the Depression by cutting back on production.
was so patently self-defeating that it's hard to believe anyone seriously believed it would work.
The goofiest application of the theory had to do with the price of gold. Starting with the bank
holiday and proceeding through a massive gold-buying program, Roosevelt abandoned the gold
standard, the bedrock restraint on inflation and government growth. He nationalized the
gold stock, forbade the private ownership of gold (except for jewelry, scientific or industrial
and foreign payments), and nullified all contractual promises--whether public or private, past or
future--to pay in gold.
Besides being theft, gold confiscation didn't work. The price of gold was increased from
to $35.00 per ounce, a 69% increase, but the domestic price level increased only 7% between
1933 and 1934, and over rest of the decade it hardly increased at all. FDR's devaluation provoked
retaliation by other countries, further strangling international trade and throwing the world's
economies further into depression.
Having hobbled the banking system and destroyed the gold standard, he turned next to
agriculture. Working with the politically influential Farm Bureau and the Bernard Baruch gang,
Roosevelt pushed through the Agricultural Adjustment Act of 1933. It provided for acreage and
production controls, restrictive marketing agreements, and regulatory licensing of processors and
dealers "to eliminate unfair practices and charges." It authorized new lending, taxed processors of
agricultural commodities, and rewarded farmers who cut back production.
The objective was to raise farm commodity prices until they reached a much higher "parity"
level. The millions who could hardly feed and clothe their families can be forgiven for
questioning the nobility of a program designed to make food and fiber more expensive. Though
this was called an "emergency" measure, no President since has seen fit to declare the emergency
Industry was virtually nationalized under Roosevelt's National Industrial Recovery Act of
Like most New Deal legislation, this resulted from a compromise of special interests:
businessmen seeking higher prices and barriers to competition, labor unionists seeking
governmental sponsorship and protection, social workers wanting to control working conditions
and forbid child labor, and the proponents of massive spending on public works.
The legislation allowed the President to license businesses or control imports to achieve the
vaguely identified objectives of the act. Every industry had to have a code of fair competition.
The codes contained provisions setting minimum wages, maximum hours, and "decent" working
conditions. The policy rested on the dubious notion that what the country needed most was
cartelized business, higher prices, less work, and steep labor costs.
To administer the act, Roosevelt established the National Recovery Administration and
General Hugh Johnson, a crony of Baruch's and a former draft administrator, as head. Johnson
adopted the famous Blue Eagle emblem and forced businesses to display it and abide by NRA
codes. There were parades, billboards, posters, buttons, and radio ads, all designed to silence
those who questioned the policy. Not since the First World War had there been anything like the
outpouring of hoopla and coercion. Cutting prices became "chiseling" and the equivalent of
treason. The policy was enforced by a vast system of agents and informers.
Eventually the NRA approved 557 basic and 189 supplementary codes, covering about 95%
all industrial employees. Big businessmen dominated the writing and implementing of the
documents. They generally aimed to suppress competition. Figuring prominently in this effort
were minimum prices, open price schedules, standardization of products and services, and
advance notice of intent to change prices. Having gained the government's commitment to
stilling competition, the tycoons looked forward to profitable repose.
But the initial enthusiasm evaporated when the NRA did not deliver, and for obvious
Even its corporate boosters began to object to the regimentation it required. By the time the
Supreme Court invalidated the whole undertaking in early 1935, most of its former supporters
had lost their taste for it.
Striking down the NRA, Chief Justice Charles Evans Hughes wrote that "extraordinary
conditions do not create or enlarge constitutional power." Congress "cannot delegate legislative
power to the President to exercise an unfettered discretion to make whatever laws he thinks may
Despite the decision, the NRA-approach did not disappear completely. Its economic logic
reappeared in the National Labor Relations Act of 1935, reinstating union privileges, and the Fair
Labor Standards Act of 1938, stipulating regulations for wages and working hours. The
Bituminous Coal Act of 1937 reinstated an NRA-type code for the coal industry, including
price-fixing. The Works Progress Administration made the government the employer of last
resort. Using the Connally Act of 1935, Roosevelt cartelized the oil industry. Eventually, of
course, the Supreme Court came around to Roosevelt's way of thinking.
Yet after all this, the grand promise of an end to the suffering was never fulfilled. As the state
sector drained the private sector, controlling it in alarming detail, the economy continued to
wallow in depression. The combined impact of Herbert Hoover's and Roosevelt's interventions
meant that the market was never allowed to correct itself. Far from having gotten us out of the
Depression, FDR prolonged and deepened it, and brought unnecessary suffering to millions.
Even more tragic is the lasting legacy of Roosevelt. The commitment of both masses and
individualism, free markets, and limited government suffered a blow in the 1930s from which it
has yet to recover fully. The theory of the mixed economy is still the dominant ideology backing
government policy. In place of old beliefs about liberty, we have greater toleration of, and even
positive demand for, collectivist schemes that promise social security, protection from the rigors
of market competition, and something for nothing.
"You can never study Franklin Delano Roosevelt too much," Gingrich says. But if we study
with admiration, the lesson we take away is this: government is an immensely useful means for
achieving one's private aspirations, and resorting to this reservoir of potentially appropriable
benefits is perfectly legitimate. One thing we have to fear is politicians who believe this.
Robert Higgs, an adjunct scholar with the Mises Institute, is research director of the Independent Institute