Monetary Central Planning and the State, Part 11: The Great Depression and the Crisis of Government Intervention

The Great Depression of the early 1930s was the most severe in modern history. Just in terms of the usual statistical figures, its magnitude was catastrophic. Between 1929 and 1933, Gross National Product in the United States decreased by 54%, with industrial production declining 36%. Between 1929 and 1933, investment spending decreased by 80%, while consumer spending declined by 40%. Expenditures on residential housing declined by 80% during this period. In 1929, unemployment had been 3.2% of the civilian work force; by 1932 unemployment had gone up to 24.1% and rose even further — to 25.2% in 1933.

The wholesale price index decreased by 32% from 1929 to 1933, and the consumer price index decreased by 23%. American agriculture saw the prices paid by farmers for raw materials, wages, and interest decrease by 32%; but the prices farmers received for their output decreased by 52%.

Between 1930 and 1933, 9,000 banks failed in the United States, causing tens of thousands of people to lose their savings. The money supply (measured as currency in circulation, demand deposits, and time deposits, or “M-2” as it is called) decreased between 1929 and 1933 by more than 30%. Even if a larger measurement of the money supply is calculated (M-2 plus deposits at mutual-savings banks, the postal-savings system, and the shares at savings and loans, a measurement known as “M-4”), the supply of money still decreased between 1929 and 1933 by about 25%.

Internationally, the Great Depression was also devastating. The value of global imports and exports decreased by almost 60%, while the real volume of goods and services traded across borders declined by almost 30%. Gross Domestic Product in Great Britain and France fell by 5% and 7% respectively between 1929 and 1933. From 1929 to 1932, industrial production fell 12%, 22%, and 40% in Great Britain, France, and Germany, respectively. Wholesale prices fell on average 25%, 38%, and 32% in Great Britain, France, and Germany, respectively. The declines in consumer prices were 15% on average in both Great Britain and France and 23% in Germany during this period.

After the 1930s, most historians and many economists interpreted these numbers as a demonstration that the capitalist system had inherent flaws and tendencies towards cumulative instability that prevented a return to a normal economic balance within any reasonable period of time. The Great Depression, therefore, came to be viewed as a “crisis of capitalism” and proof of the failure of (classical) liberal society.

This interpretation was not how the free market economists of the time viewed the early 1930s. For example, the German economist Moritz J. Bonn delivered the third Richard Cobden lecture in London, England, on April 29, 1931. His topic was “The World Crisis and the Teaching of the Manchester School.” Professor Bonn told his audience:

“The free play of economic forces has been replaced everywhere, at least in part, by private monopoly or by Government monopoly, by tariffs, and by all sorts of price control, from wage fixing by arbitration boards to valorization by farm boards. . . . There is intervention now on a big scale, based on forecasting and bent on planning, and there is a crisis much bigger than any crisis the world has seen so far. . . . For in the present economic situation of the world half of its institutions are [politically] manipulated whilst the other half are supposed to be free. The prices of the goods subject to the play of free competition have fallen all over the world. . . . The other prices have remained fairly rigid. They are manipulated by economic and political coercion, by combines of labor and capital, supported by tariffs and other manipulating legislation. . . . If selected prices and sheltered wages can be maintained whilst all other prices are declining, a new satisfactory level [of equilibrium] cannot be attained. . . . The conflict between the free play of economic forces and the manipulation by Governments and monopolies is the main cause of the long continuation of the crisis.”

It was for this reason that a year later, in 1932, Austrian economist Ludwig von Mises concluded, “The crisis under which the world is presently suffering is the crisis of interventionism and of state and municipal socialism, in short the crisis of anticapitalist policies.”

In the United States, the crisis of anticapitalist policies arose from the interventions of the Hoover administration. In November 1929, President Herbert Hoover met with leading American business and labor leaders. He said that in this period of crisis, purchasing power had to be maintained to keep the demand for goods and services high. He argued that wage rates should not be cut, that the work week should be shortened to “spread the work” among the labor force, and that governments at all levels should expand public works projects to increase employment.

First under the persuasion of the president and then through the power of the trade unions, the money wage rates for many workers were kept artificially high. But this merely created the conditions for more, rather than less, unemployment. In 1930, consumer prices fell by 2.5%, while money wages declined on average by 2%. In 1931, consumer prices fell by 8.8%, while money wages decreased by only 3%. In 1932, consumer prices declined by 10.3%, while money wages decreased by only 7%. In 1933, consumer prices fell by 5.1%, and money wages decreased by 7.9%. While consumer prices fell almost 25% between 1929 and 1933, money wages on average decreased only 15%.

Not only were money wages lagging behind the fall in the selling prices of consumer goods through most of these years, labor productivity was also falling — by 8.5% — during this period. As a result, the real cost of hiring labor actually increased by 22.8%. The “high-wage” policy of the Hoover administration and the trade unions, therefore, succeeded only in pricing workers out of the labor market, generating an increasing circle of unemployment. (See the review of Out of Work by Richard Vedder and Lowell Gallaway in Freedom Daily, October 1993.)

American agriculture was also thrown out of balance by government intervention. During the First World War, the demand for American farm output had increased dramatically. But after 1918, European demand for American agricultural goods decreased. This was due partly to a normal reexpansion of European agricultural production in the new peacetime conditions, but also to the growth in agricultural protectionism in Central and Eastern Europe that closed off part of the European market to American exports.

In the 1920s, the U.S. government attempted to prop up American farm production and income through various subsidies and federally sponsored farm cooperative programs. In June 1929, the Hoover administration established the Federal Farm Board (FFB). Once the Depression began, the FFB started to extend cheap loans to the farming community to keep output off the market and prevent prices from falling. First wheat, then cotton and wool, and then dairy products all came within the orbit of government intervention. The artificially high prices merely generated increasingly large unsold surpluses. Then the government attempted to restrict farm output to prevent prices from falling because of the very surpluses the government’s farm price support programs had helped to create.

As Austrian economist Murray Rothbard explained in America’s Great Depression (1963):

“The grandiose stabilization effort of the FFB failed ignominiously. Its loans encouraged greater production, adding to the farm surplus, which overhung the market, driving prices down both on direct and psychological grounds. The FFB thus aggravated the very farm depression that it was supposed to solve. With the FFB generally acknowledged a failure, President Hoover began to pursue the inexorable logic of government intervention to the next step: recommending that productive land be withdrawn from cultivation, that crops be plowed under, and that immature farm animals be slaughtered — all to reduce the very surpluses that government’s prior intervention had brought into being.”

In a further attempt to protect American agriculture from having to adjust prices and production to the real supply and demand conditions in the world market, the U.S. Congress passed and Herbert Hoover signed the Hawley-Smoot Tariff in June 1930. Benjamin Anderson, in his financial and economic history of the United States, Economics and the Public Welfare (1946), scathingly criticized this act of aggressive protectionism:

“In a world staggering under a load of international debt which could be carried only if countries under pressure could produce goods and export them to their creditors, we, the greatest creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Bill of June, 1930, was the crowning financial folly of the whole period from 1920 to 1933. . . . Once we raised our tariffs, 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, and prices of export commodities, notably farm commodities in the United States, dropped with ominous rapidity.”

U.S. farm exports as a percentage of farm income fell from 16.7% in the late 1920s to 11.2% in the early 1930s. U.S. exports of farm commodities fell by 68% between 1929 and 1933. Never was there a clearer case of a government intervention’s consequences being exactly contrary to its stated purpose!

After the British government abandoned the gold standard in September 1931, the Abnormal Importation Act was passed, giving the British Board of Trade authority to impose duties up to 100% of the value of imported goods. The very day the act was passed, a 50% import duty was imposed on 23 classes of goods, and all importation of those goods practically ceased. On March 1, 1932, a 10% general tariff increase was established by the British government. And in July 1932, the British government introduced preferential tariffs for countries belonging to the British Empire at the expense of other nations, including the United States.

Germany instituted import licensing and bilateral trading arrangements supervised by the government in November 1931. By 1934, with the coming of the Nazis to power in Germany, exchange controls and import licenses were reinforced as part of the new National Socialist system of economic planning.

In 1928, the French government lowered the import tariff rate to 15% and lowered it once more to 12% in 1930. But in November 1931, a foreign exchange surcharge of 15% was imposed on British goods. And beginning in mid 1931, the French government established quotas on many imported goods. Indeed, by 1936, 65% of goods imported into France were coming into the country under the quota system.

Christian Saint-Etienne, in his book The Great Depression, 1929-1938 (1984), concluded:

“Tariff restrictions were increasingly complemented by administrative measures, such as prohibitions, quotas, licensing systems, and clearing agreements. . . . Protectionism only led to a reduction in international trade, affecting all trading nations to a comparable extent, whether they initiated the trade war or merely retaliated. . . . It is clear that the collapse of international trade in the Depression made international recovery virtually impossible for a decade.”

But the follies of government interventionism did not end with these disastrous policies. There were still others that made the Great Depression even worse.

Categories: Freedom Daily Archive, Monetary Policy