US Rep from Ohio: FDR caused Great Depression

I've heard some crazy theories (like FDR prolonged the Great Depression). But this guytakes it one step further.

U.S. Rep. Steve Austria said he supports a scaled-down federal economic-stimulus proposal, but the Beavercreek Republican told The Dispatch editorial board that the huge influx of money into the economy could have a negative effect.

"When (President Franklin) Roosevelt did this, he put our country into a Great Depression," Austria said. "He tried to borrow and spend, he tried to use the Keynesian approach, and our country ended up in a Great Depression. That's just history."

Most historians date the beginning of the Great Depression at or shortly after the stock-market crash of 1929; Roosevelt took office in 1933.

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I would agree that FDR didn't cause the Great Depression but his policies did make it last much longer. A few google searchs would show the history of the Depression of 1920 & 1921. the Federal government did nothing and the depression lasted 2 years.

The Great Depression started under President Hoover who did all the wrong things and in 1932 FDR took office and did the wrong things only much, much bigger!

and I would also argue that WWII didn't end the depression, it have have helped but unemployment (non-military) and GDP did not return to pre-crash levels until 1946 if I remember correctly. WWII ended in summer 1945.

So it is not far-fetched to say that FDR's tinkering with the markets and economy did delay recovery by several years. Even his own Secretary of the Treasury (who did pay his taxes) admited that was they were doing was not working. Bigger & faster would not have made a difference toward the positive. Read Adam Smith's Wealth of Nations. it s'plains all!

Get a dozen historians and a dozen economists in the same room and you will get two dozen different opinions on the causes and results of the Great Depression. For what it is worth, here is my abbreviated take on the causes of the Great Depression (remember - full disclosure - I am a European and Latin American historian by training, so I take a more global view than might a US economist or historian):

1. Gold standard: In an age of uncertainty, many nations began to hoard gold. This was especially problematic when Great Britain returned to the GS in 1929. Now, I'm not saying here that the gold standard is ideal or loony, but the movement away from paper and toward gold had profound effects on a paper-craving global economy.

2. Post-WWI “cycle of debt” The Treaty of Versailles forced the Germans to pay billions of gold Reichsmarks to France and GB. These two nations were heavily indebted to the US after WWI, and used the reparations from Germany to pay their US debts and jump start their postwar economies. When the Germans in 1928 began missing reparations payments, the French and British also began to fall behind, and US banks started calling in loans at home and abroad to keep this cycle going.

3. Sky-high consumer debt after a decade of unprecedented purchasing in “Roaring Twenties” -Cars, homes,and appliances drove the 1920s US economy, and cheap credit fueled these industries. When people began to need cash, these industries tailed off, killing the important consumer segment of the US economy.

4. Panic-based bank failures - Frightened depositors - large and small - began pulling cash from their banks, many of which were already undercapitalized from wild stock speculation and low reserve ratios (currently US banks are mandated to keep from 3 to 10 percent for a cash reserve requirement, but many banks held incrediby small cash-to-liability reserves).

5. Surviving banks hoarded cash. Smart move in terms of self-interest for healthy banks, but doomsday for the US economy, as credit all but dried up, choking off industry.

6. Price deflation and wage deflation. Never a healthy sign when both phenomena occur simultaneously. Falling prices equaled diminishing profits, and falling wages equaled reduced consumer spending, which led to higher unemployment, and so on.

7. Smoot-Hawley Act (1930) - Declining sales and excess industrial capacity caused American industrialists to demand protection from “unfair” foreign trade, and S-H quadrupled tariff rates to 60 percent. Other nations retaliated with tariffs of their own, and international trade fell 15-20% in three years. US exports dropped from $5.2 billion (1929) to $1.7 billion (1933). The recession was made much worse with declining industrial and consumer demand from S-H.

Now as for FDR:

1. He inherited the worst US economy. Ever.
2. He made some moves that worked, and others that backfired. His policies may have prolonged the Great Depression.
3. However - FDR's ability to get people believing in the country again was extremely important. The US could quite easily have fallen into either Leninist communism or Mussolini-style fascism, both of which had strong American counterparts. While we can sit back like armchair quarterbacks and second-guess FDR, he kept the system viable. Like Reagan in the 1980s, FDR inspired people to believe in American style democratic capitalism.

PS - the 1929 stock market crash was a symptom of dire structural problems in the US and global economies. Avoid the temptaton of thinking of The Crash as a cause of the Great Depression, despite what simplistic television documentaries might claim.

PPS - The Keynesian versus monetarist/Austrian school debate may never be settled. Instead of thinking that "Keynesianism=socialism" and "Austrian school = capitalism," it is more useful to associate Keynesians with demand-side approaches to the economy and Austrian/monetarists with supply-side approaches. All of these economists are diehard capitalists at the end of the day. John Maynard Keynes despised communism, as did FDR.

PPPS- Adam Smith's Wealth of Nations is about as useful to the extraordinarily complex modern global economy as a TRS-80 user guide would be for the technicians operating the IBM Roadrunner project. Of course, this comment is utter heresy to those who worship at the Altar of the Cult of the Invisible Hand, but I had to say it. Smith was a brilliant and forward-looking thinker, but the modern world economy is light years beyond anything Smith could have imagined.

PPPPS - WWII all but wiped out unemployment, but consumer spending during the war was severely restrained due to government restrictions, mandates, and rationing. The US economy exploded after the war due to pent-up demand, the postwar GI housing boom, and the fact that almost every nation on the globe was in debt to us after the war. Within five years, the US was the world leader in exports, had the world’s largest economy, produced ½ the world’s coal and ⅔ of the world’s oil, had 80% of world’s gold reserves, and the dollar was the strongest currency in the world.

That's a decent summary you wrote. My own take:

1. Gold standard: In an age of uncertainty, many nations began to hoard gold. This is kind of thin. Sure, it contributed, but I don't think it made all that much difference.

2. Post-WWI “cycle of debt” The Treaty of Versailles forced the Germans to pay billions of gold Reichsmarks to France and GB. True, and the US was loathe to employ a collection agency. The debts should have been pursued, one way or another. Trade goods and tarriffs come to mind.

3. Sky-high consumer debt after a decade of unprecedented purchasing Dead accurate and a major factor.

4. Panic-based bank failures - Frightened depositors - large and small - began pulling cash from their banks Huge factor.

, many of which were already undercapitalized from wild stock speculation and low reserve ratios Huge, huge factor. This is kind of a recursive loop of disaster.

5. Surviving banks hoarded cash. Hoarded is kind of a relative term. What would you expect? By the time this started there were no good investments to be had, anywhere.

6. Price deflation and wage deflation. More a symptom than a cause. Kind of like seeing the water coming over the dike and realizing that the water is wearing away what's left of the dike.

7. Smoot-Hawley Act (1930) Big mistake. Big, big mistake.

While it certainly is true that WWII wiped out unemployment, it is not a remedy that I'd recommend to anyone. Unfortunately my howls seem to fall on deaf ears, as the US went through Korea and Vietnam as politicos hoped for the same results that were obtained at the end of WWII, or so I believe.

Mad Jack
Mad Jack's Shack

How's this for prolonging the Great Depression:

America saw the single largest drop in unemployment rate in history under FDR’s watch—-and this was BEFORE WWII

GDP grew at 9-10% per year, except for the recession of 1937-38. Coincidentally, FDR slashed spending and tried to balance the budget during these two years-thinking we were out of the woods. (so if slashing spending during a recession is what you mean by prolonging the depression--then I would agree--we shouldn't do it) By 1936 the Great Depression ended if you consider the data (GDP was higher than if had been before the depression started, and industrial production had outpaced pre-depression numbers)

Pink Slip

So then you are in total agreement with my comments! ;-) I am not an economist, just a history buff if you will. I do find it interesting and scary that we seem to be moving along the same lines as Hoover/Roosevelt did during their times in office. Far from doing nothing, Hoover did the wrong things. I do have to give credit to Roosevelt though, he did inspire confidence in the people...unlike today's mantra of if you don't pass this bill immediately without looking at it we will all die!

Unfortunately I believe that many people don't understand that an economy is a dynamic "entity". It has the four stages and it continues, the troughs may be lower in some instances but it will turn up eventually. Because of human nature it must. It is my belief that government can only stretch out the wavelengths...it can't stop them altogether, which is what I am hearing Obama say. In one of his speeches over the last couple of days I heard him say that government is the only entity that can "stop the cycle" which is shear stupidity in my book. That is the scary part of this whole debacle, the Democrats seem to think they can stop and/or alter the business cycle to avoid the troughs. I am afraid of them. That is like saying we can stop tornadoes from touching the earth. Can’t be done.

I think the government can and should play a constructive role in the economy, but in general I oppose interventions where government provides services that the private sector can do better. Government works much better in oversight roles than it does in "helping" people.

I am not opposed to some government efforts to minimize cyclical peaks and troughs in the economy, and while FDR's workfare schemes like the CCC were of limited benefit to the economy, they did help stabilize faith in the American system. I think that alllowing "natural" cycles that produce 15-20 percent unemployment to run their courses are too disruptive for social and political stability, and that efforts to minimize recessionary "pain" - while producing some short term drag on the economic recovery - prevent ugly scenarios like mass rioting, rises in crime, and all sorts of other negative side effects.

I agree that recessions and boom cycles cannot be prevented, but a combination of demand-side and supply-side interventions have social and political benefits that outweigh economic costs.

That being said, there is a lot of pork and programs of dubious economic benefit in the current "stimulus" bill, and not enough money is being geared toward projects that will really jumpstart the economy.

But hey - if it works, who am I to judge? At heart I am a pragmatist, not an ideologue, and the selfish part of me wants Michigan and Ohio to get as much federal dough as possible. I'm not sure I want to live in a region with chronic 15-20 percent unemployment. Keep the rabble working, and they won't be stealing my TV and cars.

I think the government can and should play a constructive role in the economy, but in general I oppose interventions where government provides services that the private sector can do better.

ARE there any incidences where the gov't can do ANYTHING better than the private sector?

I think the government can and should play a constructive role in the economy, but in general I oppose interventions where government provides services that the private sector can do better. Government works much better in oversight roles than it does in "helping" people.

Here, here.

Some "services" I think are better in the hands of government, like fire, rescue, and police. Perhaps the private sector might be more cost-effective at policing or fire duties, but I shudder to think of justice-for-pay or rescue-for-pay scenarios arising (no OJ Simpson jokes here). "Hmm,your house is on fire, but your bill is not paid. Sorry, the sucker's gotta burn, dude."

I am not a fan of the privatization of public water systems, since we need the stuff to live and functon as human beings. I think the public need for drinkable water outweighs any cost savings from turning over water systems to private companies.

Roads and related infrastructure are trickier. Sure, it might be cheaper in the short run to hire private crews to fill in potholes, but can we be certain that they won't cut corners to save a buck?

So, to answer your question in a more direct way, the private sector usually operates more efficiently, but there are some segments of the economy that I prefer to have a neutral (i.e., not devoted solely to profit) party manage. I'll trade a reduction in efficiency for peace of mind on critical issues.

Don't you know everything can be done better in the private sector? Look at Bernie Madoff. He certainly did better than the public sector would in organizing a Ponzi scheme.

Unfortunately, the idea that businessmen (and women) are always honorable creatures should have been laid to rest with Enron. Those who believed in a market without oversight should accept their failure. I do.

Now I just wonder where I can buy a "safe" brand of peanuts?

Old South End Broadway

Thanks for the chuckle, OSEB. The past decade has certainly been an interesting - though sometimes tragic - ride through reckless deregulation.

BTW: someone emailed me and asked how I was able to put together the lengthy post above in such short fashion. In the interest of transparency, let it be known that I referenced my typed notes and PowerPoint slides from one of my university lectures on the Great Depression, and that I am not normally capable of pounding out 1000-word scholarly essays in 12 minutes like a well-oiled machine.

:-}

What was curious was FDR's behavior between the election and inauguration. He and other Democrats seemed to want to exacerbate the misery during that time. Whilst Hoover was trying to stabilize the collapsing banking system, the Democrats stoked fear in the populace.

Hoover also offered to introduce any program that FDR thought would help and get the ball rolling on it. FDR met Hoover's offer with silence.

FDR did inspire confidence and for that, he deserves a great deal of credit for seeing the nation through the Great Depression. Reagan did something similar when he inherited the economic mess from Jimmy Carter.

What is interesting about the Great Depression was it was the longest depression in U.S. history. It was also the one depression that resulted in wholesale changes in how the nature does business. Coincidence?

The Long Depression was significantly longer than the Great Depression. Its economic slide lasted 65 months vs. the Great Depression's 43 month downturn.

There's a city full of walls you can post complaints at

The "Long Depression" was not a depression. There was no drop in GDP nor was their wage deflation.

The "Long Depression" is really a relic of a political term developed by those who insisted that we needed to coin silver to create inflation. The problem in the economy was a lack of price inflation in manufactured goods and in agricultural products to accompany what was otherwise reasonable wage growth and expansion of the GDP. However, currency was not available to fuel healthy inflation.

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