Chipping away at a legend
Posted by aogMonday, 06 October 2008 at 11:46 TrackBack Ping URL

Two UCLA economics professors have published a paper which blames President Frankling Roosevelt’s economic policies for prolonging the Great Depression.

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”


he [FDR] came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces.

I find the comment about cartels the most interesting one. It puts an ironic edge on the report, doesn’t it?

Comments — Formatting by Textile
Harry Eagar Monday, 06 October 2008 at 12:42

Please to explain how the cartels, which were overturned by the Supreme Court, prolonged the Depression?

This nonsense has been around for years, and as I have pointed out before, it is nonsense.

The depression began in 1922, so before Roosevelt got into office it had been in progress and getting worse, not better, for more than a decade. There was no indication, either, that it was about to turn the corner.

The idea that wages of people who were not receiving any wages were ‘above where they ought to have been’ is insane.

I understand the desperation of people who are ideologically committed to free markets to ‘save the appearances,’ but facts is facts.

Annoying Old Guy Monday, 06 October 2008 at 13:38

Please to explain how the cartels, which were overturned by the Supreme Court, prolonged the Depression?

From the abstract

Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

You wrote

The idea that wages of people who were not receiving any wages were ‘above where they ought to have been’ is insane.

Strawman. That’s not claimed anywhere in the abstract. Or perhaps I missed it, could you provide a cite?

I understand the desperation of people who are ideologically committed to free markets to ‘save the appearances,’ but facts is facts.

Yes, that’s me, truly a desperado on the great plains of ideology.

h-man Monday, 06 October 2008 at 14:27

AOG Somebody earlier had mentioned that your page was not loading properly in firefox, but periodically your page is not loading in Windows explorer or firefox. I got to this comment by clicking your links on the side of the page, which do load properly.

That is all, carry on.

Harry Eagar Monday, 06 October 2008 at 14:41

Yeah, it is you. One would-be worker in 4 was receiving no wages, so artificially high wages were not oppressing the overall economy.

I’ll tell you a little, true story. When I was a cub, my editor was a Pulitzer Prize-winning editorialist and a Roosevelt hater from the ground up. He was talking one day about how he had quit the newspaper biz in the ‘30s and taken a job selling shoes, because he wanted to get married and the newspaper didn’t pay enough for that.

So I asked him what brought him back into the newspaper biz. “Minimum wage,” he said.

He never forgave FDR for it.

I happen to know what the first minimum wage rate was, because my Dad got it. 20 cents an hour.

I didn’t ask what newspapers were paying when Fitz quit, but do the math. Selling shoes paid less than $16/wk and reporting for a newspaper paid less than that.

Just how low do you figure the market had to push wages further down in order to straighten things out? Recalling that the only economic statement that means anything is, People don’t eat in the long run, they eat every day.

h-man Monday, 06 October 2008 at 15:28

At 3:15 your page did load properly in firefox and explorer. It didn’t for several hours before that.

pj Monday, 06 October 2008 at 15:48

Harry - There’s no inconsistency in 25% of the population being unemployed, 25% making poverty wages, and 50% making above-market wages. In fact, to make the supply and demand curves intersect there’s no way to give the 50% above-market wages EXCEPT by making many of the rest unemployed.

Harry Eagar Monday, 06 October 2008 at 18:57

Huh? You might try selling that to the guys desperate to expand the H2B visa pool, but I don’t think they’ll be buying.

Anyhow, a system that tells one worker in 4, you starve ‘cause we gotta get these curves straight, so to speak, is not worth having, is it?

I would have thought that after the embarrassment so many free marketeers suffered with the Laffer Curve that they’d probably just as soon forget anybody ever heard of wage-jobs curves.

pj Tuesday, 07 October 2008 at 07:16

Yes, that’s why FDR’s system was not worth having. That’s why FDR’s system prolonged the depression by 7 years. You’ve got it now.

Harry Eagar Tuesday, 07 October 2008 at 13:35

Let’s look at a calendar. The Depression ended around 1940, and if FDR lengthened it by 7 years, that means that if he hadn’t done anything, it would have ended in 1933.

I don’t think so.

Ali Choudhury Tuesday, 07 October 2008 at 14:05

I think it ended after WW2. By then, most of the New Deal wage and industrial policies had been quietly junked in order to get war production up.

Annoying Old Guy Tuesday, 07 October 2008 at 14:11

Mr Choudhury;

The abstract puts the end of the Great Depression at 1943, which means the authors think it would have naturally ended around 1936, which seems reasonable to me. Otherwise, their thesis is basically as you state.

Peter Burnet Tuesday, 07 October 2008 at 15:01

Never mind when it ended, I’m still trying to get my head around Harry’s claim that it began in 1922. I have a sneaking suspicion he thinks the current credit crisis began in 1980.

Harry Eagar Tuesday, 07 October 2008 at 15:35

Applying the definition of recession as two consecutive quarters of shrink, then it must have ended in 1940-41.

I’d like to know, though, why employment, which was 25% in 1933 and had been increasing, would have improved to, say, 5-10% by 1936, assuming Hoover had been re-elected.

All you guys, and the professors, are doing is restating the Iron Law. As an ideal.


Tom C Tuesday, 07 October 2008 at 15:53

The New Deal was Hoover’s policies on steroids. Unemployment didn’t come down to ‘recession’ levels until 1941. Easy money and credit (Federal Reserve 1913) led to the malinvestment of the 1920’s. Utilities were built, automobiles became common, radio was new and employment was high. The bubble burst in 1929. FDR’s response to keep prices and wages unnaturally high in the face of ‘good’ deflation while over-regulating and over-taxing turned a recession into the depression. Hoover began the process by meddling when he should have stood aside and letting the markets clear. FDR was an ideological, economic nitwit who picked outstanding generals.

Annoying Old Guy Tuesday, 07 October 2008 at 16:04

Mr. Burnet;

Since Mr. Eagar is apparently not going to answer your question, I think I remember him mentioning on several occasions a collapse in farm prices around then. Here, for instance.

pj Tuesday, 07 October 2008 at 16:18

Harry - The private sector was still shrinking into 1943. Government/military employment and spending increased measured GDP, but this was heavily financed by borrowing and on certain measures of the economy there was no growth until 1943 even including government.

Peter - Perhaps Harry means the decline in farm employment after gas/diesel tractors were introduced in the 1910s. The number of farmers fell fairly steadily from 16% of the workforce in 1920 to 2% in 1970. In the period 1870-1920, farmers dropped from 27% of the workforce to 16%, but the population almost tripled in the same period, so the absolute number of farmers was rising through about 1920, and fell thereafter. It may be that Harry believes in autarky on a household scale, and yearns for the days of the farm economy.

Ali Choudhury Tuesday, 07 October 2008 at 17:25

To be fair to FDR and Hoover, nobody then understood how crucial loose monetary policy was in a time of recession. The Fed kept money too tight for too long and made matters even worse by raising reserve requirements on commercial lending.

Peter Burnet Tuesday, 07 October 2008 at 19:41


That’s quite the impressive memory. BTW, did I ever share my theory with you on how the decline of the British Empire started at the Battle of Hastings?

Annoying Old Guy Tuesday, 07 October 2008 at 20:52

No, but I eagerly await its publication at Diversely We Sail.

cjm Wednesday, 08 October 2008 at 09:57

funny enough, the battle that did mark the start of the end of the british empire was only a few miles away from where poor harold caught the arrow. i lived for a few years in kent; choc full of history.

Hey Skipper Wednesday, 08 October 2008 at 13:09

I have had problems with page loading also — I was able to read through this entire thread on Firefox before the page loaded in Safari, which I was trying because the page load in Firefox was taking so long. (Mac OS X 10.5.5; 2.4 GHz, 4 GB RAM)

Didn’t the Smoot-Hawley tariff act significantly contribute to the Depression’s severity?

Harry Eagar Wednesday, 08 October 2008 at 13:25

Nothing to do with the urbanization of America.

Starting in 1915 and encouraged by the worst president we ever had, American farmers maximized production through the end of the Great War. There was no concept of an orderly return to prewar levels, and the cancellation of British war contracts ruined the US farm implement business, which had rushed to convert to war production, then had its legs cut off. Hart-Parr, inventor of the internal combustion engine tractor, went down, for example.

Free market competition, once the rest of the world got back to farmi, had its expected effects. Instead of reducing production, desperate farmers expanded production into a glutted market. (“10-cent cotton and 40-cent meat, how in the world can a poor man eat”) .

This, like the repeal of the Corn Laws, was good for city folk but it ruined farmers. Commodity prices collapsed starting in 1922. The free market corrections did not work. The market stayed collapsed because, as Harry Hopkins said, “People don’t eat in the long run, they eat every day.”

Since in those days about two-fifths of the American population were either small primary producers or directly dependent on small, independent producers, a large fraction of the economy followed the farmers down.

Wages, even if you buy the idea that a 50-cent a day wage was ‘too high,’ had no effect because these were entrepreneurs, not wage-earners.

The stock market could continue going up while the economy crashed because you couldn’t buy stock in chicken farms in those days.

Eventually, production of manufactured goods, which was accelerating through the ‘20s, saturated urban markets. Since rural populations were no longer able to consume, the overproduction collapse hit industry, too.

Fans of recorded blues music, like me, can see the outcome in the pressings of ‘race music’ platters. Top sellers went from close to a million to under 1,000, all while Roosevelt was governor of New York.

The Depression started in ‘22 all right.

Ali Choudhury Wednesday, 08 October 2008 at 14:15

International trade was pretty minor back then compared to domestic demand. Smoot-Hawley wasn’t responsible for much damage even if it was a bad idea.

Bret Wednesday, 08 October 2008 at 17:06

Ali Choudhury wrote: “International trade was pretty minor back then compared to domestic demand.

Not so minor. From “The Decline and Fall of the First Global Economy” ( by Brink Lindsey:

“In 1913, merchandise trade as a percentage of gross output was about 12 percent for the industrialized countries. They did not match that level of export performance again until the 1970s. The volume of international capital flows relative to total output reached heights in the early 20th century that have not been approached since. In that earlier time, capital flows out of Great Britain rose as high as 9 percent of gross domestic product; by contrast, the seemingly staggering current account surpluses of Japan and Germany in the 1980s never surpassed 5 percent of GDP. It is fair to say that much of the growth of the international economy since World War II has simply recapitulated the achievements of the era prior to World War I.”

Whether or not Smoot-Hawley was directly responsible for much damage is certainly debatable, but I think it certainly had the possibility of causing an awful lot of damage, both directly and indirectly.

Harry Eagar Wednesday, 08 October 2008 at 17:43

Smoot-Hawley didn’t do as much damage to the United States (duh, it was a protective tariff) as it did to other countries.

Britain and Germany were among the worst sufferers. The UK had run a current account deficit since the ‘70s, made up by invisible exports (shipping, insurance, banking), and those were wiped out by the war. Britain couldn’t get back on her feet in the ‘20s because she could not export into a world that was overproducing and underconsuming.

This could have had very bad results, or at least so thought the monied classes during the General Strike of ‘26. (One of my favorite literary images is young Evelyn Waugh kitting up with a club to pound Reds in London.)

It did have very bad results in Germany, where the recovery (impelled by US loans to cover and more than cover the imaginary Versailles reparations) stalled out in ‘28, leading to unemployment, riots, rule by decree and Hitler. Sen. Smoot and Rep. Hawley can’t exactly be blamed for Hitler, but they can’t exactly be absolved, either.

Peter Burnet Thursday, 09 October 2008 at 05:26

Instead of reducing production, desperate farmers expanded production into a glutted market. (“10-cent cotton and 40-cent meat, how in the world can a poor man eat”) .

I think blacksmiths and corset makers had a similar problem, especially the ones who responded to declining demand by ratcheting up production.

Harry, I realize there is always special pleading for farmers and I understand the poignancy and bathos of losing the homestead that has been celebrated in countless novels, but prices for many things go up and down as a matter of course, and especially after the hyper-production of a war. What other sector of the economy would lead you to conclude there was a depression in such circumstances and in response to such economically irrational behaviour? You are describing the resignation and disconnect of an aboriginal community here.

Are you arguing that there should have been price controls for agriculture in 1922? And if so, why not for everything else?

Annoying Old Guy Thursday, 09 October 2008 at 10:20


I think you and Mr Choudhury are both correct. Note that your cite lists 1913 as the peak year. As Mr. Eagar notes, things went wrong with WWI and didn’t really recover before the Great Depression, or even until the 1970s.

Harry Eagar Thursday, 09 October 2008 at 14:25

Peter, no, not price controls. Production controls.

The Columbia agricultural economists (my hero, Rex Tugwell) understood the problem at the time and offered the solution which, when implement 12 years too late, worked, until killed off by ideologues on the Supreme Court.

There was no chance, given public understanding and Republican ideology, that such a course could have been pursued, but it should have been.

I don’t understand why free marketeers think it is OK to have an ‘orderly’ rather than pellmell restructuring of financial markets but get their backs up when someone suggests an orderly restructuring of a production sector. If ag can be allowed to crash, why not Wall St.?

(I understand that the gold bugs and extremists are asking for exactly that. They are rampant at Volokh, for example. But most of the semi-sane ones have gotten religion.)

Tracked from Political News and Blog Aggregator: Residents Of Main Street Speak Out on 06 October 2008 at 13:30

People who live and work on North Main Street in Oshkosh, Wis., talk about the $700 billion financia

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