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Exploding Some Of The Great Myths Of The Great Depression

President Franklin D. Roosevelt is seen as the hero of the Great Depression, whose economic policies put America back on its feet. But how effective were those policies, and did they really lead to America's recovery? What can today's policymakers learn from the way that the U.S. administration of the 1930s and 1940s handled the Great Depression?

Dr. Lawrence Reed, president of the Foundation for Economic Freedom, recently wrote about this in his book Great Myths of the Great Depression. In an interview on my radio show The Goldstein on Gelt Show, we spoke about the Great Depression, Roosevelt's policies, and how depressions can be handled in modern times.

For the full interview, listen to the show, or read the transcript below:

Douglas Goldstein:Dr. Lawrence Reed is the president of the Foundation for Economic Freedom. He has also written a recent book called Great Myths of the Great Depression. This was a very timely book for me to read, because so many of the ideas thrown around at the time of the Great Depression to improve the situation are being discussed to today.

Are the ideas that applied then that got everyone out of the Great Depression good ideas for us today?

Lawrence Reed: Actually, no. The prevailing thought back at that time, at least in the halls of Washington, was that government spending and government controls would get us out of the depression. But, in fact, they prolonged the depression by at least six or seven years. So I think the best way to get out of one, aside from avoiding the policies that produced them in the first place, is to allow a sick economy to recover, to get off its back, and not to burden it with additional demands in a way of government spending in taxes and regulations.

Douglas Goldstein:A lot of people say that that spending was what really launched the economy back into play. It put a lot of people back into work, and it built bridges. Of course, they'll make the parallel to what happened after 2008 with a great deal of government spending.

Lawrence Reed: If you observed a man who goes door to door in a neighborhood and grabs all the money that he can get his hands on, and then runs off to the local shopping mall and spends it, if you interviewed the shopkeepers there afterwards they'd all say yes, he stimulated the economy. But, of course, that raises the question of what would have happened if the money had not been taken from those who earned it in the first place. You are not looking at the entire picture, and in the case of the Great Depression there were government programs that seemed to put people to work, but they came at the expense of the job creation, the enterprise, and the new business formations that might have happened if government hadn't taken the money in the first place. The fact is the depression didn't end as it should have in a very short order. It was prolonged by those kinds of policies.

Douglas Goldstein: But didn't we see that people who were literally starving were then able to get some job, albeit on the government's payroll? As for the people who were paying the taxes, well Roosevelt seemed to have been trying not to tax the ultra-rich necessarily, but those people who did have enough.

Lawrence Reed: He raised taxes across the board. In fact, most Americans didn't even pay income tax before Franklin Roosevelt, but by the time he was done, most of us did. Not only did the rates go up on the lower income people, but of course on higher income people. They went to the stratosphere, as high as 91%. We really didn't get a substantial economic recovery until after World War II. A lot of people look at the fall of the unemployment rate during the war and say, "Well, even if Roosevelt didn't get the economy moving, at least the war did." But the fact is that we drafted 11 million men and sent them overseas, so they didn't count in the unemployment figures. But the real growth in the economy came after the war, when we got a massive reduction in federal spending and substantial reductions in business income tax rates.

Douglas Goldstein:Explain to us something about how unemployment is measured, because even today I know this is a very difficult issue. Some people will say, "Well, unemployment is down," while others say, "Unemployment is not down. It's just being hidden because of all of the people who are discouraged workers." My two questions are: a. Was that the way it was calculated back then?

b. What does that really mean?

Lawrence Reed: The way the official unemployment figures are arrived at has changed quite a number of times over the years. About the way we calculate it today: the Bureau of Labor Statistics is not the same as it was calculated back then. Politicians seem to find ways, especially in difficult times, to define out of the labor market as many people as many unemployed people as they can so that the official numbers look a little better. There's no question that if we included people who have given up on the search for jobs, the official rate will be much higher than it is today. It might even still be in double digits.

Douglas Goldstein:How can we know that? I've heard that batted around quite a bit, but are there real numbers that we have or is it just anecdotal evidence?

Lawrence Reed:A lot of it is anecdotal based on surveys. In fact, you may have noted that in my answer I said the unemployment rate might be in double digits. We don't know exactly what it might be. There's a lot of guess work involved in this, too, so I think it's more important to look at trends in the numbers, as opposed to any particular number at any given time because there's a lot of fudge factor in the way they are calculated.

Douglas Goldstein: I want to dive into this a little bit further because growing up and going to school, Roosevelt was often seen as a champion of the poor. He developed policies, he developed Social Security and health care to help people out. He seemed like a good guy, and not only that, he was elected four times, which is more than anyone ever has been or will be again. So even though there are critics of his, it seems that the people at that time and for many, many years afterwards supported his policies. Were they just blinded or was there some merit to the policies?

Lawrence Reed:Certainly in contrast to Herbert Hoover, who seemed to be cold and aloof, although he was just as interventionist as Roosevelt was in many respects, Roosevelt did seem to be interested in the ordinary guy. He could be mesmerizing as a speaker. He gave great fireside chats, and politicians are often judged more by their rhetoric than by the actual outcomes of their policies. Now Roosevelt's margin in the elections in which he ran for president declined, but then finally with the coming of World War II, there was a widespread sentiment of "you don't kick out the guy in charge at the time of crisis." So in that sense, his last term was probably an easy one to get elected to. But unfortunately we don't look so much at real economics and actual outcomes of policies. We judge politicians more by, "Do they seem to be a nice guy who's on my side?" Does he give a good speech? In those days, there was a great deal of loyalty to the commander in chief, who seemed to be doing things even if they weren't all together working out.

Douglas Goldstein:The feeling that I'm getting from you is that a lot of policies of Roosevelt were not what solved the problem. So what did actually get the U.S. out of the Great Depression? Was it the war?

Lawrence Reed:There is a widespread belief that the war did that for us, but I think that we should be careful with that because war is not an answer to depression. It diverts resources, and in that sense it actually may set us back. It's true that unemployment rates fell. As I mentioned, that was in part because we drafted 11 million men, but because we had to win the war effort, we were not making things like refrigerators and automobiles and consumer items. We were diverting resources to the production of planes and bombs and tanks. Now we had to do that arguably to win the war, but I wouldn't confuse that with economic recovery. That didn't come until we drastically reduced government spending after the war and also reduced business income tax rates. In 1945, Roosevelt's successor Harry Truman signed into law a reduction in the top income tax rate for businesses from 90% to 38% overnight, and that was a big reason for the burst in investment after the war.

Douglas Goldstein:The problem with economists with all due respect is that they are only able to test one sample of what happened, which is what happened. They can't go back and say, "Let's redo the Great Depression, and this time we'll have low government intervention and low taxes." But can you give me similar periods? Are there examples that we could maybe look at, where the government really did have a hands-off approach, and the depression was just a little blip instead of a long term multi-decade problem?

Lawrence Reed: Yes. In fact the example I can give you occurred only eight years before the Great Depression started, and that was in 1921. We had a very sharp, deep depression, but we hardly remember it today because it was over within eight months. The reason that it was over with so quickly is that the federal government did what it ought to do facing such a situation. It drastically reduced its spending, it reduced tax rates, and it backed off in the economy. It didn't bail out businesses, it didn't prolong the depression, and it was over very quickly. James Grant, a very good economist, has recently written a book about this called the Forgotten Depression, and he makes this very point. We did the right thing in 1921, and it was over with in no time at all.

Douglas Goldstein:If we wanted to maybe set some examples, or set some policy today, because frankly I think we are dealing with a tricky situation given the fact that there are the Paul Krugmans of the world who are saying that, "The reason that we got out of the 2008 crash was because we printed money and we lowered interest rates to basically zero, and as long as we keep it that low and continue to borrow, we'll be able to continue to stimulate the economy and look, look at the stock market. Look how great things are." Why is that wrong, and how can we convince people that maybe they need to be a little more responsible?

Lawrence Reed:These kinds of polices often look good in the near term, and that's only been what, seven years, or eight years, since the beginning of the last recession? That's a drop in a bucket. Twenty or 30 years from now, we may look back and say what we thought seemed to be a good idea to recover from that recession, printing a lot of money, actually had long run and very dire consequences. So I wouldn't judge the printing of so much money in the last few years by its immediate results. I would tend to look at what it's likely to produce in the long run and I think there's a good reason to be concerned. I don't think this is a sustainable policy, and we may see at some point the chickens come home to roost, and the full effects of it will not be nice.

Douglas Goldstein: How can people follow you and follow your work?

Lawrence Reed:I would encourage people to give our website a look. It's www.fee.org. There's lots of fresh content every weekdays, 70 years of archive material, easily searchable and very relevant. It's one of the top websites in economics in the world.