A groundbreaking study by UCLA economists Harold Cole and Lee Ohanian demonstrates that President Franklin D. Roosevelt’s excessively pro-labor, anti-competitive New Deal actually prolonged for seven long years the severe economic pain immortalized in John Steinbeck’s “Grapes of Wrath.”
Using 1929 data, the two researchers calculated what wages and prices would have been had without the New Deal, and then compared them to actual wages and prices at the time. Their findings were startling: In 11 key industries, actual wages averaged 25 percent higher than market conditions warranted, but unemployment was also 25 percent higher as well. Meanwhile, the New Deal pushed up prices 23 percent higher than they should have been, so consumers couldn’t afford to buy, leading to even more unemployment.
Cole and Ohanian blame FDR’s National Industrial Recovery Act for “short-circuiting the market’s self-correcting forces.” Instead of stimulating the economy, they argue, FDR managed to depress it even further. Without government intervention, the Great Depression would have ended in 1936 instead of 1943. If FDR unnecessarily prolonged the Great Depression, thank the Federal Reserve Bank for starting it. Current Federal Reserve chairman Ben Bernanke conceded the central bank’s culpability in a Nov. 8, 2002 speech honoring University of Chicago free market economist Milton Friedman on his 90th birthday.
During the Roaring ‘20s, the Federal Reserve was busy pumping “easy money” into the nation’s banking system, distorting price signals, and sending a false message of prosperity to Wall Street tycoons, who responded by engaging in highly speculative lending practices. Sound familiar? Bernanke concurred with Friedman’s basic argument that changes in the money supply were responsible for causing the changes in the economy that directly led to the 1929 collapse. “I would like to say to Milton and [his wife] Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry,” Bernanke said. “But thanks to you, we won’t do it again.” Don’t count on it. As Cole and Ohanian point out, generations of economists and voters have learned the false lesson that free people and free markets cannot be trusted and that major government intervention is needed to prevent another Great Depression, even though the facts now clearly show otherwise.
