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The Masked Tulip

1930s Depression - Comments From Experts Of The Time Reveal A Very Familiar Tone

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Good read indeed, liked this bit.

And more thoughts...

*** The images of the ‘30s keep coming back. TIME has put Franklin Roosevelt’s picture on its cover, as if he were the man of the hour now.

Americans think they are confronted with a challenge, which... with proper leadership...t hey will overcome. Madoff has been locked up; now it’s just a question of beefing up those regulators so it doesn’t happen again. The stimulus packages have been set up; now we just have to wait for them to do their work. The Fed has done its part too; it’s just a matter of time until all that money and credit it put into the banking system turns up in the consumer economy.

And Obama... isn’t he just like Roosevelt? Isn’t he taking advantage of this crisis to help build a stronger... fairer... US economy?

If you read the papers you might think so. In the New York Times, Felix Rohatyn, has written a remarkable essay – remarkable in the sense that he has managed to take up 2/3 of a page without saying anything. To help him do so, he calls on the first Roosevelt, Theodore: “He insisted on government’s obligation to regulate the large new business aggregations not so much to address the inequalities of wealth as to police its potential distorting influence... to reinforce the new system, not weaken it.â€

Mr. Rohatyn goes on to advise Obama:

The work ahead, he says, “will require difficult and painful actions, which can only come from a multi-year, bipartisan plan, led by the president and the Congress, with the support of business and labor.â€

Blah, blah...blah... What he is urging on the nation is more central planning – with no idea how or why central planners will be better at controlling other peoples’ money than people are at controlling their own. And imagine the ‘plan’ that would have the support of politicians of both parties, business interests and labor; it’s bound to be a disaster – like all of Teddy Roosevelt’s plans.

But it’s the other disastrous Roosevelt that catches most looks. The one on the cover of TIME magazine. This was the Roosevelt who, with the help of Herbert Hoover, turned the correction of the early ‘30s into the Great Depression. Rather than let the markets quickly correct the mistakes of the ‘20s, he tried to put them in a strait jacket. And rather than let people sort out their own finances, he set up a huge bureaucracy to bring Mussolini-style central planning to America. That bureaucracy is still with us – including Fannie Mae, which was instrumental in creating the housing bubble... and the SEC, which was instrumental in camouflaging the risks of in the investment markets.

But there’s no point in going on about the two Roosevelts. TIME and the nation believe they were great heroes who practically single-handed saved the country from destruction. No use trying to tell them anything different.

So, instead... we will continue our lonely vigil – watching to see what mischief these clowns undertake next... and how we might protect ourselves...

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There are only two forces in nature Yu Faz reminds us – expansion and contraction, up and down, love and hate/fear. “All forces must remain in balance.†Is it possible that the credit expansion that began after WWII and lasted until 2007...taking the debt to GDP ratio from about 150% to 360%... has contracted in the space of 24 months? Have the mistakes of the Bubble Epoque been corrected already? Are household balance sheets back in balance?

The economy needs to breathe, just like we can't breathe in forever neither can the market expand forever.

Contraction is healthy, unless there has been gross stupidity by people who do not understand how things work.

Albert Einstein:

Only two things are infinite, the universe and human stupidity, and I'm not sure about the former

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The economy needs to breathe, just like we can't breathe in forever neither can the market expand forever.

Contraction is healthy, unless there has been gross stupidity by people who do not understand how things work.

Albert Einstein:

Only two things are infinite, the universe and human stupidity, and I'm not sure about the former

the big government central planners hero

made the depression worse

and they are making the same mistakes now


February 1995

Volume 13, Number 2

How FDR Made the Depression Worse

Robert Higgs

Franklin Roosevelt "did bring us out of the Depression," Newt Gingrich told a group of Republicans after the recent election, and that makes FDR "the greatest figure of the 20th century." As political rhetoric, the statement is likely to come from someone who does not support a market economy. The New Deal, after all, was the largest peacetime expansion of federal government power in this century. Moreover, Gingrich's view that FDR saved us from the Depression is indefensible; Roosevelt's policies prolonged and deepened it.

There's no doubt that Roosevelt changed the character of the American government--for the worse. Many of the reforms of the 1930s remain embedded in policy today: acreage allotments, price supports and marketing controls in agriculture, extensive regulation of private securities, federal intrusion into union-management relations, government lending and insurance activities, the minimum wage, national unemployment insurance, Social Security and welfare payments, production and sale of electrical power by the federal government, fiat money--the list goes on.

Roosevelt's revolution began with his inaugural address, which left no doubt about his intentions to seize the moment and harness it to his purposes. Best remembered for its patently false line that "the only thing we have to fear is fear itself," it also called for extraordinary emergency governmental powers.

The day after FDR took the oath of office, he issued a proclamation calling Congress into a special session. Before it met, he proclaimed a national banking holiday--an action he had refused to endorse when Hoover suggested it three days earlier.

Invoking the Trading with the Enemy Act of 1917, Roosevelt declared that "all banking transactions shall be suspended." Banks were permitted to reopen only after case-by-case inspection and approval by the government, a procedure that dragged on for months. This action heightened the public's sense of crisis and allowed him to ignore traditional restraints on the power of the central government.

In their understanding of the Depression, Roosevelt and his economic advisers had cause and effect reversed. They did not recognize that prices had fallen because of the Depression. They believed that the Depression prevailed because prices had fallen. The obvious remedy, then, was to raise prices, which they decided to do by creating artificial shortages. Hence arose a collection of crackpot policies designed to cure the Depression by cutting back on production. The scheme was so patently self-defeating that it's hard to believe anyone seriously believed it would work.

The goofiest application of the theory had to do with the price of gold. Starting with the bank holiday and proceeding through a massive gold-buying program, Roosevelt abandoned the gold standard, the bedrock restraint on inflation and government growth. He nationalized the monetary gold stock, forbade the private ownership of gold (except for jewelry, scientific or industrial uses, and foreign payments), and nullified all contractual promises--whether public or private, past or future--to pay in gold.

Besides being theft, gold confiscation didn't work. The price of gold was increased from $20.67 to $35.00 per ounce, a 69% increase, but the domestic price level increased only 7% between 1933 and 1934, and over rest of the decade it hardly increased at all. FDR's devaluation provoked retaliation by other countries, further strangling international trade and throwing the world's economies further into depression.

Having hobbled the banking system and destroyed the gold standard, he turned next to agriculture. Working with the politically influential Farm Bureau and the Bernard Baruch gang, Roosevelt pushed through the Agricultural Adjustment Act of 1933. It provided for acreage and production controls, restrictive marketing agreements, and regulatory licensing of processors and dealers "to eliminate unfair practices and charges." It authorized new lending, taxed processors of agricultural commodities, and rewarded farmers who cut back production.

The objective was to raise farm commodity prices until they reached a much higher "parity" level. The millions who could hardly feed and clothe their families can be forgiven for questioning the nobility of a program designed to make food and fiber more expensive. Though this was called an "emergency" measure, no President since has seen fit to declare the emergency over.

Industry was virtually nationalized under Roosevelt's National Industrial Recovery Act of 1933. Like most New Deal legislation, this resulted from a compromise of special interests: businessmen seeking higher prices and barriers to competition, labor unionists seeking governmental sponsorship and protection, social workers wanting to control working conditions and forbid child labor, and the proponents of massive spending on public works.

The legislation allowed the President to license businesses or control imports to achieve the vaguely identified objectives of the act. Every industry had to have a code of fair competition. The codes contained provisions setting minimum wages, maximum hours, and "decent" working conditions. The policy rested on the dubious notion that what the country needed most was cartelized business, higher prices, less work, and steep labor costs.

To administer the act, Roosevelt established the National Recovery Administration and named General Hugh Johnson, a crony of Baruch's and a former draft administrator, as head. Johnson adopted the famous Blue Eagle emblem and forced businesses to display it and abide by NRA codes. There were parades, billboards, posters, buttons, and radio ads, all designed to silence those who questioned the policy. Not since the First World War had there been anything like the outpouring of hoopla and coercion. Cutting prices became "chiseling" and the equivalent of treason. The policy was enforced by a vast system of agents and informers.

Eventually the NRA approved 557 basic and 189 supplementary codes, covering about 95% of all industrial employees. Big businessmen dominated the writing and implementing of the documents. They generally aimed to suppress competition. Figuring prominently in this effort were minimum prices, open price schedules, standardization of products and services, and advance notice of intent to change prices. Having gained the government's commitment to stilling competition, the tycoons looked forward to profitable repose.

But the initial enthusiasm evaporated when the NRA did not deliver, and for obvious reasons. Even its corporate boosters began to object to the regimentation it required. By the time the Supreme Court invalidated the whole undertaking in early 1935, most of its former supporters had lost their taste for it.

Striking down the NRA, Chief Justice Charles Evans Hughes wrote that "extraordinary conditions do not create or enlarge constitutional power." Congress "cannot delegate legislative power to the President to exercise an unfettered discretion to make whatever laws he thinks may be needed."

Despite the decision, the NRA-approach did not disappear completely. Its economic logic reappeared in the National Labor Relations Act of 1935, reinstating union privileges, and the Fair Labor Standards Act of 1938, stipulating regulations for wages and working hours. The Bituminous Coal Act of 1937 reinstated an NRA-type code for the coal industry, including price-fixing. The Works Progress Administration made the government the employer of last resort. Using the Connally Act of 1935, Roosevelt cartelized the oil industry. Eventually, of course, the Supreme Court came around to Roosevelt's way of thinking.

Yet after all this, the grand promise of an end to the suffering was never fulfilled. As the state sector drained the private sector, controlling it in alarming detail, the economy continued to wallow in depression. The combined impact of Herbert Hoover's and Roosevelt's interventions meant that the market was never allowed to correct itself. Far from having gotten us out of the Depression, FDR prolonged and deepened it, and brought unnecessary suffering to millions.

Even more tragic is the lasting legacy of Roosevelt. The commitment of both masses and elites to individualism, free markets, and limited government suffered a blow in the 1930s from which it has yet to recover fully. The theory of the mixed economy is still the dominant ideology backing government policy. In place of old beliefs about liberty, we have greater toleration of, and even positive demand for, collectivist schemes that promise social security, protection from the rigors of market competition, and something for nothing.

"You can never study Franklin Delano Roosevelt too much," Gingrich says. But if we study FDR with admiration, the lesson we take away is this: government is an immensely useful means for achieving one's private aspirations, and resorting to this reservoir of potentially appropriable benefits is perfectly legitimate. One thing we have to fear is politicians who believe this.

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