Franklin Roosevelt and His New Deal Prolonged the Great Depression



As we face increasing governmental size, spending and spending deficits that have brought the economy to a standstill over the past several years, let us not forget the merry gentleman that started the notion that the government could fix all evils – FDR.  Now that we have come full circle and the government has backed itself into a spending corner from which it will be very diffiicult to extract itself, let’s look at the “New Deal” that launched unsustainable government spending.

FDR came into power much as Obama at a time when all he had to do to win was not to be the party in power.  Banks were a mess, unregulated Wall Street abuses (marging accounts and the like) and unprecedented levels of unemployment.  Sound familiar?  FDR’s brilliant scheme was for the government to spend America’s way out of the depression.  Sound familiar again?  Created the first serious income tax to pay for the jaunty ride, FDR’s “New Deal” stood for the proposition that only something as big and powerful as Federal Government could bring us out of the depths of depression.  Unfortunately it didn’t work (still sounding eerily familiar, isn’t it?)

In his book, FDR’s Folly, How Roosevelt and His New Deal Prolonged the Great Depression, author Jim Powell details how the excesses of the Roosevelt spending program actually slowed economic recovery and only World War II acted to snap the American Economy out of the doldroms.

In his book, Mr. Powell details the economic devastation incurred by President Roosevelt’s actions:

Contrary to Black’s claim that FDR helped “banish the Depression,” FDR’s New Deal failed to resolve the most important problem of the era, namely unemployment that averaged 17%. FDR came to power in March 1933, the worst point of the Great Depression, with a quarter of workers unemployed, and during the next three months there were heartening signs of a rebound. Nondurable goods manufacturing jumped 35%, durable goods manufacturing jumped 83%, and the stock market started to rise. At this rate, unemployment would have been down to about 5% by the fall of 1934.

However, investors and businessmen soon realized how FDR’s fabled “Hundred Days” of madcap legislation would throttle business. For example, the Securities Act, passed on May 27, 1933, made it more difficult for employers to raise capital. On June 16, 1933, FDR signed the National Industrial Recovery Act, authorizing some 700 industrial cartel codes (1) to force wages above market levels, which discouraged employers from hiring, and (2) to force prices above market levels, which discouraged consumers from buying. To maintain high prices, production was cut back – the opposite of what was needed for recovery. The economy had a relapse as manufacturing declined, and the unemployment situation failed to improve.

We should have learned our lesson 70 years ago that you cannot spend and regulate your way out of a recession.  It is only through reduced government that we will return to economic prosperity.

About Geoff Willis