Montreal, October 15, 2008 • No 260


Bradley Doucet is QL's English Editor. A writer living in Montreal, he has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness.






by Bradley Doucet


          Liberty is won and preserved not primarily with guns, but with ideas. Spreading freedom requires that we spread an understanding of the benefits freedom brings, that we explain to whoever will listen how freedom is really in everyone's best interest. In making the case for a truly free society, however, we will inevitably come up against a wide array of illiberal beliefs that keep others from embracing our vision of a better world. The more we seek to understand those beliefs, the better we will be able to counter them and address the concerns that underlie them. In this ongoing series, I address some of the issues we can expect to face, along with brief outlines of the kinds of responses I think can be helpful.


BELIEF # 18: Capitalism caused the Great Depression

October 15, 2008

          It is becoming increasingly common for commentators to allude to the Great Depression when writing about the current economic crisis in the United States and around the world. For all of our sakes, I sincerely hope that the allusion is hyperbolic, but there is a sense in which it could not be more apt: Then, as now, the failures of intrusive government policies were blamed on allegedly free, unregulated markets; and then, as now, those government failures were used to argue for ever more intrusive policies. While it is true that some deregulation has taken place in recent decades, critics of capitalism exaggerate these salutary changes. In truth, the market today is in many ways more heavily regulated than ever before.

          It remains imperative for current defenders of liberty to challenge the all too common misconception that unfettered, free-market capitalism caused the Great Depression. The first step in debunking this myth is to shine a light on the role of the Federal Reserve in inflating the money supply in the 1920's, fuelling the creation of the bubble that finally burst when the stock market collapsed in 1929. It was (and still is) argued that government control of the money supply is a way to ease the severity of business cycles, but the Federal Reserve did just the opposite in the 1920s, exacerbating first the boom and then the bust. No depression in the entire history of capitalism prior to the Fed's creation in 1913 had been anywhere near as severe, prolonged, and widespread as the Great Depression.

          Another step in eradicating this myth is to re-examine the role of Herbert Hoover, President of the United States from 1929 to 1933. The common misconception has it that Hoover's hands-off, laissez-faire response made the Depression worse than it had to be. There is no question Hoover did make the Depression worse, but was it really by keeping his hands off of the economy? As Lawrence W. Reed writes in "Great Myths of the Great Depression," FDR sure didn't think so: "During the [1932] campaign, Roosevelt blasted Hoover for spending and taxing too much, boosting the national debt, choking off trade, and putting millions on the dole."

          And Roosevelt was right. The Hoover administration's Smoot Hawley Tariff Act of 1930, which Reed calls "the most protectionist legislation in U.S. history," sharply raised tariffs on just about everything, leading foreign governments to retaliate with tariffs of their own. With governments around the world clamouring to shoot themselves in the foot, imports and exports plummeted, making everyone worse off. According to Reed, "The shrinkage in world trade brought on by the tariff wars helped set the stage for World War II a few years later."

          Hoover also pressured business leaders into keeping wages high despite falling profits and prices, which predictably resulted in high unemployment; he dramatically boosted federal government spending; and he doubled the federal income tax. With friends like these, the free market doesn't need any enemies.

          But it got one anyway, in the person of Franklin Delano Roosevelt, who succeeded Hoover as President in 1933. After having campaigned against Hoover's big-spending, big-taxing, protectionist ways, FDR did a complete about-face. His New Deal policies represented not a change in direction, as is commonly believed, but a continuation and an extension of Hoover's failed strategy. After promising to reduce federal government spending by 25 percent, FDR oversaw an 83 percent increase from 1933 to 1936. Comprehensive minimum wage laws pleased some workers, but at the cost of making unemployment worse. Meanwhile, the government raised taxes on agriculture and then "used the revenue to supervise the wholesale destruction of valuable crops and cattle," hurting millions of consumers in the name of raising prices to help farmers. Under FDR, top income tax rates hit 90 percent and business was hogtied six ways till Sunday.

          Predictably, the Depression dragged on. In fact, it is hard to imagine how FDR, Hoover, and the Fed could have screwed up the economy any worse than they did. As Reed writes, "Those who can survey the events of the 1920s and 1930s and blame free-market capitalism for the economic calamity have their eyes, ears, and minds firmly closed to the facts." Defenders of liberty must teach others the facts many have never learned. The Great Depression was not caused by the free market; it was caused by "political bungling on a grand scale." The sad part is that if not enough of us learn our lesson properly, we will surely all be held back and made to repeat it.



Current Illiberal Belief >>>


17. Democracy is a cure-all
16. Self-sacrifice is good
15. Everyone is selfish—and that's bad
14. Free markets are utopian
13. Change is bad
12. You're either with us or against us

11. The environment is steadily deteriorating
10. Resources are limited
09. It's a small world
08. Morality must be enforced
07. The truth is obvious
06. Good intentions are enough

05. Charity must be enforced
04. We are our brothers' keepers
03. Theft can be justified
02. Order comes from above
01. Government is good