By: Andrew Demosthenous
William Mansfield manufactured cotton twine and threads during the Civil War. These threads were sewn into cotton blankets and used by Union soldiers fighting to preserve our Union and end the oppression of slavery . When the war ended, Mansfield gave the company to his son George, who began to manufacture fishing lines. George H. Mansfield & Company produced some of the world’s finest fishing line, and the business flourished as he developed a new, innovative designs for high-grade, waterproof lines of various weights. The highly successful company, internationally renowned and in business since 1849, expanded several times, creating jobs and prosperity for hundreds of workers. With business booming, the company was passed down from father to son for another two generations. George H.’s grandson, Frank, decided to expand the business again in 1932. This, unfortunately, proved to be a fatal move. The Great Depression had begun and Frank Mansfield, my great-great-grandfather, lost the nearly 100-year-old family business in addition to his livelihood, his wealth, and, worse, his dignity (Mansfield). This story, passed down to me be my maternal grandfather, inspired me to learn more about the causes of The Great Depression and whether or not it could have been avoided.
I had been taught in school that an unregulated free market caused the economic depression and that the almighty, yet merciful hand of government saved our country. However, my research into the subject leads me to believe otherwise. It is my position that the government not only caused, but prolonged, the Great Depression that contributed to the failure of my great-great-grandfather’s business. The primary reasons for the economic downfall that resulted in The Great Depression were the actions of the Federal Reserve, the policies of President Herbert Hoover, and the protectionist acts passed by Congress. Had the government not intervened so hastily and negligently, the deepest and longest-lasting depression in our nation’s history may not have been as dark or protracted.
A primary factor that led to The Great Depression were the actions of the Federal Reserve and its inflationary policies. The Federal Reserve is the central bank of the United States and was created in 1913 to provide the nation with a more secure, flexible, and stable monetary system. In 2002, nearly half a century later, Ben Bernanke, then a member of the Federal Reserve Board of Governors, publicly acknowledged the role of the Fed in the cause of The Great Depression. Bernanke said “We did it. We’re very sorry. But… we won’t do it again” (Richardson). (How ironic!) Throughout the 1920’s, the Federal Reserve increased the total bank reserves, thus generating a mass expansion of both member and nonmember banks, which kept their reserves as deposits with other member banks. As a result, there was a 47.5% increase in total reserves and a 62% increase in the money supply. This caused mass inflation (Rothbard 102). By increasing the money supply, it devalues the currency, which caused inflation. Some inflation introduced slowly is generally somewhat tolerable, but mass inflation is not as it quickly erodes the value of currency. The Federal Reserve greatly contributed to the inflation of the depression era. As an example, the Fed discounted bills, which are bills that are not purchased but represent loans to member banks that are rediscounted and given on IOU’s (Rothbard 116). This process is highly inflationary and just postpones a bank’s eventual failure. Despite its effect, the process was used freely and excessively, particularly in 1923, 1925, and 1928 and given to banks in distress as a way to keep from failing. Worse still, the Federal Reserve made changes in their rediscount rate with such a low penalty that the borrowing banks did not lose money, causing other banks to follow suit. Even after the Federal Reserve caught on, it kept delaying a rise in interest rates until it was too late. Such inflationary practices ultimately devalued the US currency, thereby contributing to economic collapse.
A great boom-bust cycle, a process of economic expansion and contraction, is most commonly generated by monetary intervention in the market by bank credit expansion to business, which creates heavy amounts of inflation. It was a common practice by the Federal Reserve throughout the 1920s. The Federal Reserve issued mass acceptances which ultimately had no obligation to be repaid and had a very low interest rate. An acceptance is a contractual agreement to pay the amount due on a loan at a specified date. Not only did this result in increased inflation, but such practices generated a mass bubble by both creating and subsiding an artificial acceptance market. Additionally, the Federal Reserve regularly bought its own acceptances at an artificially cheap rate and resold them at an even lower rate to keep the market going. Then, the Federal Reserve also refused to buy acceptances directly from businesses and would only do so through a third party, unnecessarily subsidizing a market for dealers which created another bubble in another artificial market (Rothbard 132). This process of artificially selling acceptances continued until the first half of 1929, when the Federal Reserve propped up its buying rate, which promptly caused a great decline in the stock market leading to the great market crash (Rothbard 127). The Federal Reserve also bought a massive amount of German bonds shortly before the German economy collapsed, despite warnings from other nations, thus causing the United States to lose its investment (Rothbard 131). The Federal Reserve further contributed to high inflation by tripling the stock of government securities between 1921 and 1922. However, inflation harms the economy because it devalues the currency, which ultimately contributed to the depression.
The Federal Reserve also made multiple financial mistakes, primarily with Britain, in attempts to help foreign governments and boost American exports. During 1921 and 1922, the Federal Reserve decided to inflate the money supply and institute cheap credit to stimulate the floating of foreign loans. Cheap credit constitutes a loan or credit with a low interest rate. In 1925, the Governor of the Federal Reserve, Benjamin Strong, in an attempt to help Britain return to the Gold Standard, gave Britain a line of credit up to $200 million dollars. Additionally, J.P. Morgan, as a sign of good faith, gave credit of $100 million dollars to Britain. The Federal Reserve then gave an additional $10 million to Belgium in 1926, $5 million to Poland in 1927, and $15 million to Italy in 1927 (Rothbard 145). By lending out all this gold, less gold was available in the Federal Reserve’s supply. Therefore, this action additionally contributed to inflation. .
The Federal Reserve further caused even more inflation in 1924 by raising American price levels relative to the suffering Great Britain and by lowering interest rates in an attempt to try to return Britain to the Gold Standard (Rothbard 146). But, by lowering American price levels to the level of a country in an economic depression, the Federal Reserve was setting America on a course towards depression as well. Additionally, , the Federal Reserve, in 1927, sold enormous amounts of gold to France at the same low price it would have been bought from Britain, despite higher transportation costs. The Federal Reserve then expanded credit and lowered interest rates. At the same time, it bought $60 million worth of sterling from the Bank of England, and then launched a line of cheap credit on a burst of inflation (Rothbard 147). All of this was done with the goal of helping the British economy. Despite these numerous inflationary effects on the US Dollar already, Britain strongly pushed for further inflating the US dollar throughout the 1920s.
Another contributing factor of The Great Depression was the passage of the Fordney-McCumber Tariff of 1922 by Congress. This tariff was a steep protectionist tax which crippled European industry and kept demand for US goods severely higher than what it would have been without government intervention. When the effects of this on the European economy were noticed, Congress, instead of simply repealing the tariff, decided to promote cheap money at home in order to stimulate foreign borrowing and monitor gold inflow from abroad (Rothbard 138). This resulted in creating and establishing a lending and inflation bubble that peaked in mid-1928. It also established American trade, not on a solid foundation of reciprocal and productive exchange, but on a feverish promotion of loans that would later be revealed as unsound. As a result, foreign nations were unable to sell goods to the United States but were encouraged to borrow money. Since these foreign nations could not sell goods to repay their debts, they continued to borrow at an accelerated pace in order to repay their loans (Rothbard 139). These policies caused massive inflation and pushed the United States heavily toward the Depression.
One of the Federal Reserve’s biggest mistakes, though, was massively pouring funds into the stock market. This created an artificial boom that grew stock prices by 20% in less than a year. The Federal Reserve then tried to halt the boom by reducing the total reserves by $261 million and raising time deposits by $1.15 billion This caused the money supply to rise by $1.51 billion in the first half of 1928 (Rothbard 159). If the Federal Reserve had not done this, the depression would have been less severe. For example, The Federal Reserve’s policy of buying acceptances to hobble inflation failed. This was because banks, knowing that the Fed would buy all available acceptances, sold as many as they could. In turn, the government needlessly bought more than $300 million worth of acceptances in the last six months of 1928 alone (Rothbard 160). As a result of the mass acceptance purchases, reserves increased by $122 million and the money supply increased by $1.9 billion, which would later peak (Rothbard 160). The money supply actually reached $73 billion higher than at any time since the inflation had begun. As a result of the artificial market, stock prices began to skyrocket by 20% from July to December 1928, and the Federal Reserve neglected to raise discount rates in order to fix the problem. Thus, discounts to banks increased, and they were not able to sell any of its more than $200 million stocks in government securities (Rothbard 161). Thereby, the artificial boom in stock prices, ultimately set the stock market on a crash course. It generated greater inflation, which lead to a harsher recession.
Presidents preceding Pres. Hoover handled economic downturns very differently than he did in this situation. Preceding presidents demonstrated that allowing the panic to run its course is the most effective way to handle the situation. Examples of this include President Grover Cleveland’s handling of the Panic of 1893, President Martin Van Buren’s management of the Panic of 1837, and President James Monroe’s oversight of the panic of 1819. To be more specific, President Cleveland vetoed any legislation that would have provided aid to suffering businesses or farmers. It was common orthodoxy that government interference in the economy only prolongs economic downturns. However, President Herbert Hoover chose a more interventionist approach. When he was Secretary of Commerce prior to becoming President,, he encouraged Congress to create a Financial Trade Corporation. This cost taxpayers $100 million. A year later, in 1922, Sec. Hoover recommended the state of Kansas pass a law regulating key industries like public utilities.
Pres. Hoover began his term by advocating that the government expand credit and fund shaky financial positions. The week of the stock market crash, Hoover got the Federal Reserve to add $300 million in reserves. Additionally, the Federal Reserve doubled the holdings of government securities, added $150 million in reserves, and discounted about $200 million more from member banks (Rothbard 215). This was catastrophic because instead of the economy going through a rapid and healthy liquidation of unsound positions, the economy, instead, was continuously propped up by government measures. These measures prolonged the depression. The expansion was supposed to prevent the necessary liquidation of the stock market and permit New York City banks to take over broker loans that were being liquidated by other non-bank lenders. However, the banks expanded their deposits during the fateful last week of October 1929 by $1.8 billion (nearly 10%), of which $1.6 billion were increased deposits in New York City banks and only 0.02% were in banks outside of New York. Meanwhile, the Federal Reserve also lowered its rediscount rate from 6% to 4.5% while considerably lowering acceptance rates (Rothbard 216). By mid-November, this created a very temporary short-term fix for the stock market through artificial credit that would soon cause an even greater collapse.
Hoover further stalled recovery by creating a massive public works project that included the creation of $400 million worth of buildings, to be built by public construction crews(Rothbard 217). To truly understand the failure of Hoover’s policies, one must first understand renowned economist and philosopher, Frédéric Bastiat’s “Parable of the Broken Window.” According to the parable, if a boy breaks the window of a baker, then the shopkeeper must pay a repairman to fix it. The community may think that the boy has actually stimulated the economy because the repairman profits. However, the payment to the repairman reduces the disposable income of the shopkeeper and robs other industries of that amount (Hazlitt 23). Similarly, funding for these $400 million worth of public works projects could have been used for a more productive purpose by the individual taxpayers. In addition to the previously-discussed public works projects, Hoover also approved taxpayer-funded subsidies for ship construction and an additional $175 million taxpayer dollars for additional public works projects. This all ultimately prolonged the depression because it stopped the invisible hand of the market from clearing away the waste. Hoover then gave massive amounts in subsidies to farms. This obviously failed. His actions resulted in an oversupply of farm products, which would not have been produced had the economy been allowed to fix itself. By 1930, the economy was such a massive depression that Hoover’s advisers sought a change of policy. They realized that a switch to laissez-faire policies was necessary. However, Hoover was obstinate, and he, along with the Federal Reserve, instituted more easy money programs, against the wishes of advisors. This program caused rediscount rates to go from 4.5% to 2% by the end of the year and caused the rates on acceptances and call loan rates to fall, which led to more inflation (Rothbard 242). When Hoover’s farm-subsidies plan backfired, he and Congress decided to pass the Smoot-Hawley Tariff. This raised U.S. tariffs on over 20,000 imported goods to record high levels, despite warnings from almost all the nation’s top economists that this would severely damage the American export market (The Battle). When, as predicted, the tariff failed, Hoover tried to pressure Congress into raising other tariffs which further damaged the export market. By passing such highly protectionist tariffs, other nations were no longer able to buy US goods. The global economy spiraled downward and out of control.
With the economy in decline, the federal government did an investigation into bankruptcy laws. Many people were taking advantage of such laws, which, in turn, damaged creditors. Another enormous mistake made by the Hoover Administration was persuading companies to keep wage rates up. This practice made companies unable to lower wages to make up for losses in profits.This eventually became the prime generator of unemployment. Additionally, the Hoover Administration reduced immigration by 90%, preventing cheap labor from the immigrant workforce and enabling the wage rate to stay high (Murphy 98). Despite the public work programs being such failures, President Hoover continued to advocate for their expansion and for the imposition of low credit rates. Another mistake of Pres. Hoover’s policies was his work sharing program, which did not allow employers to discharge their least marginally effective workers. With all these programs failing, Pres. Hoover attempted to have federal regulation imposed on the stock market. When Congress would not allow Hoover to implement these regulations, he forced Richard Whitney, the Head of the Stock Exchange, to withhold loans of stock for purposes of short selling. When this backfired, Hoover still tried to get more public works programs going, which led to the unemployment rate to rise by 16% and manufacturing unemployment rate to rise by 20% in the span of a year. In the 1931, the following year, there were even further decreased in production, prices, and foreign trade. Meanwhile, currency and bank deposits went from $53.6 billion to $48.3 billion in the span of a year, and the aggregate money supply fell from $73.2 billion to $68.2 billion. Despite the economy being in shambles, government expenditures rose from $4.2 billion to $5.5 billion, resulted in a $2.2 billion deficit in 1931 alone. This, again, contradicted the Parable of the Broken Window (Rothbard 261). Pres. Hoover, again attempted to expand the public works projects and keep wage rates up. By propping up wages, Pres. Hoover was interfering with the invisible hand’s ability to cut the inefficiencies and bring supply and the demand into equilibrium. As an analogy to the Broken Window parable, Pres. Hoover was forcing the shopkeeper to pay for his window repair instead of allowing him to use these funds for other purposes. Pres.Hoover also created a relief fund filled with over $352 million in taxes in the first few years of his presidency. However, these monies could have been used by business to stay afloat and continue to generate new wealth. Instead, these funds only being redistributed by the government.
Pres. Hoover’s policies were often attacked during the latter half of his presidency by Henry Ford, Calvin Coolidge, the leaders of The National Association of Manufacturers, and officials in the Chamber of Commerce. Under this immense scrutiny, Pres. Hoover blamed the prolonged depression on short selling and insisted that there should be more public works. His short selling restrictions ended up sinking the market again. In response, Pres. Hoover created a National Credit Corporation, NCC, with capitalization of $500 million from taxes, to extend credit to banks in need and to permit banks to extend credit to other banks or industrial firms. He then asked insurance companies not to foreclose on mortgages and, in return, gave them federal loans in the amount of $125 million, then in a three-month period loaned an additional $153 million to 575 banks (Murphy 165). When this didn’t work, Pres. Hoover tried an additional series of interventionist steps. He instituted a major tax hike in order to: (1) establish a reconstruction finance corporation, which would use treasury funds to lend to banks, industries, agricultural credit agencies, and local governments – this backfired because it again went against the invisible hand and the Broken Window parable; (2) create a discount system for home loan banks to revive construction and unemployment, which did not work because of the maintenance of wage rates and public works; (3) expand aid to federal loan banks instead of just letting the free market take care of itself; (4) setup a public works foundation to plan even more projects, including granting loans of $300 million to states in relief, which again ignored the power of the market’s invisible hand; and (5) reform bankruptcy law so that less people could qualify as bankrupt. The President then, instead of cutting expenditures to relieve the economy, imposed new taxes and raised existing ones. (Rothbard 285). He instituted taxes on gas, tires, automobiles, electric energy, malt, toiletries, furs, and jewelry, to name a few examples. He further increased sales taxes on bank checks, bond transfers, telephones, telegraphs, radio messages, and then increased admission and stock transfer taxes. Hoover raised the personal and corporate income tax, doubled the estate tax, instituted a 33.3% gift tax, eliminated the small corporation exemption, and raised surtaxes and postal rates (Rothbard 287). The excessive taxation created further strife. This is because by raising the taxes and forcing the maintenance of the wage rate, working people were stuck at an artificially high rate that could not be raised or lowered, despite the increases in tax. Hoover’s failed policies continued into the Roosevelt administration. The US was eventually rescued from the depression by World War II and the loosening of the depression era policies in its aftermath. American industry was revitalized by the war. With so many in the armed services, unemployment was reduced as more jobs became available. Additionally, the overly interventionist policies of this Depression era came to an end as the government no longer heavily intervened with the free market economy. Both the war and President Harry Truman’s post-war policies ultimately saved the US from the Depression.
If President Hoover and Congress had not intervened so aggressively,the recession would have run its natural course. A laissez-faire approach would have enabled the invisible hand of the market to correct the economic downturn. A free market fix would have been quicker and not turned the recession into a full-fledged depression. Previous presidents, including Pres. Van Buren, Pres. Monroe, and Pres. Cleveland had already shown that a less interventionist approach helped to curb the economic panic that arose during their terms. Each of these presidents had to determine how, if not whether, to respond to the economic downward spirals of their day. Each of these leaders followed actions consistent with their beliefs in the limited powers of the federal government. They led the country away from depression by allowing the market to correct itself. Pres. Hoover, like his predecessors, is often remembered as a non-interventionist and many textbooks depict him as a conservative in favor of small government who stood by and did nothing as the economy collapsed. Nothing could be further from the truth! Hoover kept pushing “cures” that were worse than the disease. He was not simply a spectator; he actively intervened in the economy. The myth of Hoover as a champion of laissez-faire can be debunked by his aggressive use of government resources to “fight” the Depression.
Pres. Hoover and Congress extended the size and scope of the federal government across the board, including: increased federal spending, agriculture subsidization, a mandated wage policy, restricted immigration, limited international trade, and unprecedentedly high taxation. These are certainly not the policies of a laissez-faire president. Pres. Hoover undertook numerous measures designed to stimulate the economy, all of which went against free market principles. From the Revenue Act of 1913, which raised income taxes across the board, including a rise on top incomes from 25% to 63% to the Smoot-Hawley Tariff of 1930, which imposed the highest tariffs on imported goods in US history, each action had disastrous effects for both the US and world economies (Horwitz). His intervention in the private sector by propping up wages, was clearly not a bystander move. Instead, it showed his lack of trust in the corrective forces of the market and his readiness to use government power to tackle the Depression. Pres. Hoover, himself, admitted to a grand scale of government intervention during a 1932 campaign speech by saying, “We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic” (Horwitz). These are not the words of a bystander. Pres. Hoover went on to say that the programs he put in place were unparalleled in the history of any country, at any time, in a depression. According to Pres. Hoover, he intervened to provide employment, aid agriculture, maintain the financial stability of the nation, and protect people’s savings and homes. That speech was given in 1932, early on in the Depression. As history shows, his interference actually prolonged the Depression for a decade.
The Great Depression was one of the most impactful and significant economic events in American history. While its origins and longevity are often blamed on an unregulated market, I believe the facts prove otherwise. It was, in large part, caused by government intervention mostly stemming from the Federal Reserve’s inflationary policies as well as President Hoover’s heavy-handed governmental interventions. If Pres. Hoover and Congress had not interfered with oppressive, protectionist measures, then I believe the economic downturn would have run its course. I would like to believe that George H. Mansfield & Company would still be in business, handed down by my great-great-grandfather, Frank, to the hands of my grandfather, George. Instead my grandfather was a factory worker his entire life for W.R. Grace & Company, an American chemical conglomerate. Known for dumping toxic waste and settling with the Environmental Protection Agency for millions in cleanup costs, their contrast in principles to our family’s fishing line business could not be more different. Additionally, to say that the Great Depression ended in 1939 is short-sighted. It effects are long-lasting; lives and the lives of future generations were changed. Learning from this history is so important. We cannot continue to repeat the mistakes of our past, but regrettably, we often do. The government’s response to the 2008 financial crisis provides a perfect example of the failure to learn from the mistakes of the past. I, myself, am deeply saddened in realizing that we could have perhaps prevented the Depression. However, by challenging long-accepted views on why it happened and which policies were at fault, my generation has the opportunity to prevent such a calamity from ever occurring again.
Photo Source: Herbert Hoover Presidential Library and Museum
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- Mansfield, George M. Jr. Personal Interview. – Nov. 2016
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Hazlitt, Henry. Economics in One Lesson. New York: Three Rivers, 1979.