The Government was the Primary Cause of the Great Depression

(Sources@comments)The question at hand is whether or not the government was the primary cause of the great depression. In arguing that it is I will, of course, talk about how government caused the initial fall in the economy from 1929-1932. But of more importance is the discussion of how the policies that followed created an environment that stopped the economy from recovering for more than a decade. After all, recessions had come and gone many times in American history prior to the great depression. What made this one different was that the government attempted to intervene into the economy in a way never seen before. The results were disastrous.Monetary Policy:The federal reserve first contributed to the great depression by fueling the speculative bubble that led to the stock market crash of 1929. From 1921 to 1929 we see a 61 percent increase in the money supply and yet no increase in currency in circulation (Rothbard 93). One thus sees then that the expansion was in credit nor currency. One can further see that a substantial cause of this expansion was a rise in the prominence of time deposits in commercial banks which, under, and because of, the regulation of the federal reserve, had a lesser reserve requirement than the previously more popular demand deposits(Rothbard 99-100). More over, the expansion was led by an increase in total reserves which was not only caused by federal reserves policies, but in fact overpowered the deflationary pressure exerted by reserves outside of the fed's control(Rothbard 108). We also see that the treasury increased the money supply, via the purchase of silver, by some 211 million dollars (Rothbard 117). All of this loose credit allowed leveraged speculation that was ultimately put an end to in 1929.Thus the fed led the credit induced boom in the stock market. It is no surprise then that it was key in ending it. The fed, frightened by an unsustainable stock boom as-well the outflow of gold from the united states into Europe (Smiley), decreased total reserves by $261 million in 1928 (Rothbard 160). On top of this, the Federal Reserve raised its discount rate and tightened credit in the stock market.(Rothbard 165-166). The picture drawn here then is one of the Fed fueling a credit induced speculative bubble and then going out of its way to make that bubble pop.Once the depression began the Fed allowed the money supply to contract sharply (Wheelock 11) and allowed its real discount rate to rise in order to halt gold outflow (Fisherback 5). Thus the often noted bank panics of the early depression which took the 1932 bank holiday to stop (Smiley). To its credit the fed did begin to engage in open market operations in 1932, but, in the words of the Nobel laureate Milton Friedman, it was too little too late (Fisherback 7).Following 1932 the Fed led a more sensible, though still much too timid, policy. The economy as a whole was improving as the 30's progressed. That is, until the fed, and others, had a sudden change of heart in 1937. Due to absurd fears of inflation the federal reserve DOUBLED reserve requirements (Smiley). Not surprisingly this, in conjunction with bad fiscal policy, caused a second recession in 1937 which saw unemployment shoot up 7 full percentage points in a year (Smiley).Fiscal Policy:Now that I have addressed monetary policy I can move on to fiscal policy. The place to start, of course, is Herbert Hoover. Herbert hoover did a great number of things to harm the economy in the early 1930's. In 1930 he passed the Smoot Hawley Tarrif which doubled taxes on import, and contributed heavily to a 66% fall in imports between 1929 and 1933 (Fisherback 27). Perhaps even worse, Hoover raised taxes in 1932, thus further dampening aggregate demand (Smiley). But Hoover's greatest attack on prosperity came in his actions towards wages. He help a conference which ensured that industrial wages would be kept stable (Ohanian 8). Due to deflation, nominally stable wages actually entailed an increase in real wages in the first years of the depression (Ohanian 29). During this time period industrial production fell by 34%. compared to total factory productivity which only fell 5%. We can make sense of this only if we look at hours worked which fell by 40%, no doubt due to the artificially high wages imposed by hoover (Ohanian 3-4). Hoover further raised the cost of labor by requiring all federally aided projects to pay the union wage with the davis-beacon act of 1931 (Horwitz 5). If that wasn't enough he passed The Norris-LaGuardia Act in 1932. This act gave unprecedented power to unions and even went as far as to make union-free labor contracts unenforceable in federal courts (Baird). Given hoovers destruction of aggregate demand via tariffs and taxes in conjunction with his artificial increases in real wages and the sharp contraction of the money supply allowed by the fed is it any surprise that our economy looked like it did in 1933?Now for Roosevelt. Roosevelt's first offense is his policy towards labor. He passed the Wagner act in 1935 which gave the unions even greater power. They could now force collective bargaining, and an employer could now longer engage in the practice of choosing to hire non union workers (1). It further allow union workers to force non union works of the same firm into a union with a majority vote thus allowing unions to monopolize labor (Smiley). Fdr also, of course, created social security and with it a new tax on labor in 1936 (Smiley). The Fair Labor Standards Act of 1938 brings into existence the minimum wage as-well as forced overtime pay (2). These policies in conjunction, not unlike hoovers, massively discouraged firms from purchasing labor.Next we have the NIRA. The NIRA was implemented by Roosevelt in-order to fight competition. In purposely instituted monopolies and oligopolies, kept prices high, and restricted output (Cole and Ohanian). It would be difficult to think of a policy which would have a greater negative effect on the efficiency of the market. Fortunately though, it was declared unconstitutional in 1935.Then we have 1937. As I have noted elsewhere, the economy took a turn for the worse in the recession of 1937 after having progressed forward in the years prior. And while this is partly to blame on the federal reserve for doubling reserve requirements Roosevelt also shares in responsibility. In 1936 Roosevelt, in the midst of the great depression, tried to balance the budget. He did this by increasing taxes. He upped taxes to such a degree that income tax revenues increased by 66% from 1936 to 1937 (Velde 19). As a result of such policies we see that government had collected 57% more total revenue in 1940 than in 1927 (Higgs 573). The exact opposite of how tax policy should work in an economic slump.And lastly we have the psychological affect of FDP's policies. He caused what is known as regime uncertainty. He left investors worried about the future of the market. Would FDR create a primarily government run economy in the near future? Would new taxes be introduced? Polls from the time period show that many businessmen were unsure (Higgs 577-578) and that they were consciously aware of the fact that this uncertainty, caused by the policies of FDR, was stopping business from expanding (Higgs 577). After all, why would one make an investment that would reap its profits 5 years from now when one is unsure if profits will substantially exist 5 years from now! This hypothesis helps explain the fact that private investment took a huge fall in the 1930's that didn't sustainably recover until 1946 long after FDR's rain and the age of the New Deal.Thus FDR's policies of increased taxes, making labor artificially expensive, creating regime uncertainty, and purposeful contraction of industrial output, helped to create the great depression. One can see then that government caused demand to fall, MS to contract and Unemployment to rise for over a decade.