When the Depression Became the Great Depression: Going from Bad to Worse

The reader will know that the stock market crash of October 1929 is associated with the Great Depression. But how is it associated? Was it the cause of the Great Depression? Or was it a symptom of what was already going to happen — a sort of leading indicator?

For a century, economists and historians have debated those questions, without arriving at conclusive answers. They’ve also asked these kinds of questions: When did the Great Depression end? If the stock market crash caused it, was it the only cause? If the stock market crash didn’t cause it, what might have been the cause or causes? Could the Great Depression have been avoided?

While few definitive explanations have emerged, some hypotheses seem generally to be more plausible than others, e.g., it is now widely accepted that the stock market crash did not cause the Great Depression, but rather was a reflection of a nervousness or an awareness of some troubling economic trend in the making. The stock market functions primarily as a barometer of investor psychology. Stock prices go up when people have optimistic expectations. Stock prices go down when people have grim forebodings.

Another generally endorsed hypothesis is that, whatever the cause or causes of the Great Depression may have been, the depression didn’t have to be great. It could have been merely an ordinary depression, not a great one.

The Depression went from being merely a depression to being the Great Depression because of government intervention in the economy. Economies organically seek equilibrium. An event or situation, like a depression, which takes an economy out of equilibrium, will trigger the economy to rearrange itself in order to work its way back to equilibrium. When governments take action to fix ailing economies, these actions, despite their good intentions, get in the way of the natural process of returning to equilibrium.

The reader will be aware of President Roosevelt’s New Deal programs, a mixture of massive government spending, massive tax increases, and massive increases in government debt. While intended as a way to help the economy, FDR’s New Deal prevented the economy’s mechanisms from automatically compensating for any deviations from equilibrium and from thereby bringing the economy back to balance, as historian Ben Shapiro writes:

According to Professors Harold Cole and Lee Ohanian of UCLA’s Department of Economics, FDR’s policies prolonged the depression by at least seven years.

FDR tried and abandoned different strategies in quick succession. But all of his strategies shared a common element: the assumption that the government should intervene in the economy, rather than stand back and let the economy sort itself out. At one point Roosevelt persuaded many manufacturing companies to give their workers an outrageous 25% raise; in return, those companies were given permission to raise their prices substantially. Here was the core of the problem: the government should have no say in how much people are paid; it should have no say in which prices manufacturers charge for their products. The catastrophic results of FDR’s wage and prices controls were predictable, as Shapiro explains:

Not surprisingly, wages were 25 percent above market level, but unemployment was also 25 percent higher than it should have been. Demand stalled because of artificial boosts in prices.

Professor Ohanian clarifies why wage and price controls lead only to more problems:

High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns, as we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces.

Likewise, Professor Cole describes how the economy’s self-correcting mechanisms are stymied when the government tries to correct the problems:

President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services. So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.

What drove FDR’s economic decision-making? Henry Morgenthau was one of FDR’s close personal friends; Morgenthau became friends with Roosevelt long before either of them entered politics, and twenty years before Roosevelt became president. Not only was Morgenthau Roosevelt’s friend until the latter died in 1945, he was also appointed by Roosevelt to a series of government positions, culminating in his appointment as Secretary of the Treasury by Roosevelt. He remained in that post for over a decade during Roosevelt’s presidency.

Despite good political and personal relationships with Roosevelt, Morgenthau described FDR as essentially uninformed about economics. During one of his political campaigns, FDR bragged about his education, saying “I took economics courses in college for four years.” The registrar at Harvard, however, revealed this to be untrue.

Accounts provided by a number of Roosevelt’s friends and appointees confirm that he often chose arbitrary numbers and used them to set economic policy, as Ben Shapiro reports:

FDR’s own economic ignorance is legendary. According to historian Amity Shlaes, FDR used to tinker with the price of gold arbitrarily. At one point, he raised the price of gold by 21 cents because he said it was a “lucky number, because it’s three times seven.” Henry Morgenthau, part of FDR’s brain trust, said later, “If anybody knew how we really set the gold price through a combination of lucky numbers, etc., I think they would be frightened.”

It remains plausible that there were few or no coherent systematic underpinnings for FDR’s economic policies, and that those policies did more harm than good, preventing what would have been a small depression from self-correcting. The New Deal policies made a short-term depression into the Great Depression, causing it to last longer and have more extreme impacts than it otherwise would have had, as Shapiro describes:

FDR’s policies greatly lengthened the Depression and made it far worse than it otherwise had to be.

It may be taken as an axiom that government actions in the economy — regulating, taxing, creating a national debt — prevent the economy’s own organic self-correcting mechanisms from doing what they do best: keeping the economy at a prosperous equilibrium point.

Jim Crow Governments Shackle Free Enterprise: Regulating Businesses Empowers Racism

Anyone familiar with the painful struggle for civil rights in the United States has read about “Jim Crow Laws.” What were these laws? They were regulations which enforced various forms of segregation and discrimination.

But why were they “laws”? They were the actions of a powerful government: a government powerful enough to impose regulations on where people lived, where they worked, where they shopped, and where they ate. They are examples of what the abolitionists hoped to avoid when they developed the concepts of a “limited government” and a “weak government” — those abolitionists who were agitating to end slavery already during the 1700s.

During the late 1800s and early 1900s, “segregation was imposed governmentally,” in the words of historian Ben Shapiro. It was not a social or cultural desire. It had to be imposed precisely because society and culture would not voluntarily go along with it.

It was especially necessary for governments to impose segregation on businesses. In the world of buying and selling, racial prejudice makes no sense. A business is not interested in the color of a person’s skin; it is interested in a person’s money. A consumer is not interested in a manufacturer’s gene pool; she or he is interested in the quality and price of a product.

Because a “free market” economy is intrinsically anti-racist, racists needed the government to control the businesses. If the country had a weak and limited government, it would not have been able to enforce a racist agenda. Progress toward justice and toward civil rights is the search for a weak government.

Free and unregulated markets are economies in which customers and businesses are free to make choices. In situations in which the government did not force businesses to segregate by means of Jim Crow Laws, they were already desegregating even before any civil rights legislation was enacted, as historian Ben Shapiro writes:

In February 1960, four black students in Greensboro, North Carolina, sat down at the counter at Woolworth’s. This was four years before the Civil Rights Act. By July 1960, Woolworth’s lunch counter desegregated itself, after losing $200,000. The market worked.

Racists have an affinity toward strong controlling governments: with such power, the racists can force segregation on society. Anti-racists have a desire for a weak and limited government: under such governments, businesses are free to buy and sell for motives of profit instead of motives of race.

“The bottom line is that racists cannot trust free markets to racially discriminate,” writes economist Walter Williams. “Racists need the force of government to have success.”

Williams goes on to report that “from the 1880s into the 1960s” it was not business, but government, that “enforced some form of segregation through what were known as Jim Crow laws.”

If a business ever acts in a racist manner, it usually is because the government forces it to do so. Business don’t often want to act in a racist way, because racial calculations don’t usually maximize profits.

Those few businesses which act in racist ways usually pay the price. For example, Lester Maddox owned and operated a restaurant in Atlanta, Georgia. He would not allow any African-Americans into the restaurant as customers. When three Black people walked up to the restaurant in April 1964 and asked to be seated, he responded by brandishing an ax handle, implying his willingness to use violence. Lester Maddox’s racist ways were not profitable, and soon he and his restaurant were out of business. Meanwhile, other restaurants in Atlanta who happily served any paying customer continued profitably. Although a failure in business, Lester Maddox was rewarded for his racist actions: the Democratic Party chose him as its leader and as governor of Georgia.

The example of Maddox is the example of a business whose racist ways of operating do not optimize profit; the business suffers as a result. By contrast, the Montgomery Bus Boycott shows how an anti-racist company, National City Lines (NCL), was forced by the government to act in racist ways. NCL was a private company which was hired by various cities to operate bus systems in those cities. NCL had been hired by Montgomery, Alabama to run the city’s buses. But the city government imposed a restriction on NCL. It insisted that the buses be segregated.

After examining the “sit in” actions at segregated lunch counters, Ben Shapiro looks at the bus example:

Then there’s the Montgomery bus boycott. In 1955, city ordinances required segregation on buses. Rosa Parks and the NAACP organized a massive boycott that resulted in 40,000 black people refusing to take the buses the day after Parks’ famous refusal to move to the back of the bus. The only reason that the bus company refused to abide by the demands of the boycotters is that they were in negotiations with the city, and the city ordinances prevented them from doing so.

Not only did the government of Montgomery inflict segregation on the passengers of the buses, but it regulated the bus company, forcing it to segregate, and thereby forcing it to act in a way which did not optimize profits. Left to their own devices, businesses will desegregate, because segregation is not the most profitable option. Businesses will segregate only when governments force them to do so, as Shapiro explains:

The market is better at uprooting such discrimination than the government is without invading the rights of private business owners to choose their clientele.

The real estate sector provides a clear example. Readers will know that the term “redlining” refers to the practice of marking some neighborhoods as “off limits” to Black homebuyers. This practice was often established by means of “covenants” in real estate deeds. Racists were able to keep African-American home-buyers out of neighborhoods only because the government enforced these real estate covenants. If the government were a limited government, which allowed free market real estate transactions, then it would not have been powerful enough to keep Black people out of these neighborhoods.

Freed from the restraints imposed by Jim Crow Laws, real estate agents and home sellers would have sold houses to African-Americans. Those who sell real estate seek only to sell to the highest bidder; sellers have no interest in skin color or gene pools.

The most powerful tool to promote justice and to advance civil rights is an unregulated business environment. When buyers and sellers are free to simply look for the “best deal,” then racism is quickly ignored in favor of profit.

Racism without a connection to a strong government is a nasty, evil, and toothless sentiment. It is ugly, but also relatively powerless. Racism in the presence of a strong government is empowered to inflict harm, pain, and suffering. When a society ordains a limited government, instead of powerful government, racism is prevented from having concrete effects.

Why Did It Take So Long? The Abolition of Slavery in the United States

There is no simple explanation for the history of slavery in the United States. From 1607, the time of the first permanent settlement in what would become the thirteen colonies and later the thirteen states, to 1863, the year of Lincoln’s Emancipation Proclamation, there is no easy narrative to decipher the events in North America. Rather, there is a complex series of occurrences.

And when a coherent unifying narrative is formed incorporating all of those occurrences, new data are discovered, demanding the formation of a yet more complicated narrative.

In 1652, not even half a century after Jamestown’s founding, the Rhode Island legislative body outlawed slavery in that colony. This achievement was the result of abolitionists, including Roger Williams, who had begun agitating for the abolition of slavery in Rhode Island in 1636. In the same year that this legislation was passed, 1652, Samuel Sewall was born, who carried the abolitionist agenda forward, this time in Massachusetts, authoring anti-slavery texts.

To call the anti-slavery agitators in the 1600s ‘abolitionists’ is somewhat anachronistic, because the word at that time was not often so used. Yet in substance they were exactly that.

Here is, then, a great mystery: Given the vigorous start which the abolitionist movement had by the mid 1600s, and given that more than half the population in each of the thirteen colonies, later thirteen states, was opposed to slavery, why did slavery persist for so long?

Even in the slave states, a majority of the population was not enthusiastic about slavery. Slaveholders and their sycophants defended the institution energetically, but they were less than half of the population in the slaveholding states. While the minority in those states enjoyed an economic advantage from slavery, the free majority understood slavery as undermining economic opportunities. Free men who did not own slaves, but who lived in slaveholding states, saw their income driven downward by the institution of slavery.

Yet slavery persisted.

The slaveholders were perhaps so deftly able to defend slavery because they had disproportionately large economic resources, they mastered the skills of political and legal maneuvering, and they did not eschew the use of violence in pursuing their goals.

A majority of the “founders wanted to abolish slavery,” as Ben Shapiro notes. The slaveholders and their supporters, despite being a distinct minority, found procedural ways to coerce the remainder of the new nation into allowing slavery, as Shapiro writes:

From its founding, the United States attempted to come to grips with slavery and phase it out. The state of Vermont was the first sovereign state to abolish slavery, in 1777. During the debate over the Declaration of Independence, Thomas Jefferson wanted to include a provision that would have condemned King George III for “wag[ing] cruel war against human nature itself, violating its most sacred rights of life and liberty in the persons of a distant people who never offended him, captivating and carrying them into slavery in another hemisphere, or to incur miserable death in their transportation hither.” Southern states demanded that this provision be removed in return for joining the revolution. Having no choice, Jefferson removed the clause.

By the time the new Constitution was written in 1787, the situation was still the same. The minority percentage of pro-slavery citizens in the United States refused the majority’s wish that the new government do away with slavery entirely. The abolitionists nonetheless found a way to weaken the pro-slavery bloc: the “three-fifths” clause.

This clause has been debated and misunderstood for over two centuries. The abolitionists refused to give the slaveholding states a one-for-one representation for their slaves in Congress. Why should a slaveholding state have a greater representation in Congress than a free state, when the slaves were not allowed to vote? Should the size of a state’s representation be based on the number of people in that state, or on the number of free people? If a state with slaves were to obtain a larger representation by including the number of slaves in the calculation, then the pro-slavery bloc would have an overwhelming and undefeatable hold on Congress, and slavery could never be abolished. Only by reducing the representation of the slaveholding states could the abolitionist cause find a foothold in the legislative process.

By not reducing the formula to zero, the new Constitution also created an inherent structural instability, a conceptual disequilibrium, which would guarantee that the issue of abolitionism would never go away. It would continually resurface until the matter was resolved once and for all.

John Brown, along with many of his family, was part of an abolitionist network which included David Hudson and a young Ulyses S. Grant.

In 1859, John Brown was instrumental in nudging the abolitionist movement away from its pacifist leanings. If the slaveholders were willing to use violence to defend slavery, John Brown and David Hudson reasoned, then the abolitionists and slaves together might use violence to end slavery, as historian Franklin Benjamin Sanborn wrote in 1878:

Old Squire Hudson, for whom the town so-called in Ohio was named, and who was the leading man in that section where Brown spent his boyhood, was not only an abolitionist fifty years ago, but that he favored forcible resistance by the slaves.

So it was, then, that over two centuries’ worth of abolitionism culminated in the Abraham Lincoln’s Emancipation Proclamation, and arduous but successful work of implementing that proclamation, along with the three amendments to the Constitution between 1865 and 1870, during the last two years of the Civil War and during the Reconstruction Era.