How FDR Ended the Great Depression



As Dr. Robert P. Murphy, co-author of The Politically Incorrect Guide to the Great Depression and the New Deal wrote at Mises Daily:

…Paul Krugman, who wrote in a recent op-ed,

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into depression. To be fair, there's some question about whether Mellon actually said that; all we have is Hoover's version, written many years later.


These examples (and countless others) underscore one of the most pervasive myths of American history: we are taught that the stock-market crash of 1929 turned into the Great Depression because Herbert Hoover sat in the White House fondling a copy of the Constitution while the country begged for federal intervention.

This is hogwash. Herbert Hoover did more to intervene in the peacetime economy than any prior president. Indeed, he set in motion all of the things that FDR later did in the New Deal. I argue in my book> on the subject that Herbert Hoover bears responsibility for the Great Depression because he was such an interventionist. When FDR came into office, he merely upped the ante on everything Hoover had started, and that's why the nation stayed mired in depression for another decade.

With great respect to Dr. Murphy, his indictment of FDR for having “merely upped the ante on everything Hoover had started,” while carrying with it a measure of truth, overlooks one critical thing that FDR got right.

As Rueff observed in The Monetary Sins of the West (The Macmillan Company, New York, New York, 1972, p. 101):

Let us not forget either the tremendous disaster of the Great Depression, carrying in its wake countless sufferings and wide-spread ruin, a catastrophe that was brought under control only in 1934, when President Roosevelt, after a complex mix of remedies had proved unavailing, raised the price of gold from $20 to $35 an ounce.

As investment manager Liaquat Ahamed wrote in his Pulitzer Prize winning history Lords of Finance: The Bankers Who Broke the World (The Penguin Press, New York, 2009, pp. 462-463):

Roosevelt’s decision to take the dollar off gold rocked the financial world.  … Indignant bankers lamented the loss of the one anchor that could keep governments honest.  Bernard Baruch, the noted financier, went a little overboard though when he said that the move, ‘can’t be defended except as mob rule.  Maybe the country doesn’t know it yet, but I think we may find that we’ve been in a revolution more drastic than the French Revolution.’

But in the days after the Roosevelt decision, as the dollar fell against gold, the stock market soared by 15%.  Even the Morgan bankers, historically among the most staunch defenders of the gold standard, could not resist cheering.  ‘Your action in going off gold saved the country from complete collapse,’ wrote Russell Leffingwell to the president.

Taking the dollar off gold provided the second leg to the dramatic change in sentiment… that coursed through the economy that spring. … During the following three months, wholesale prices jumped by 45 percent and stock prices doubled.  With prices rising, the real cost of borrowing money plummeted. New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.

The Wall Street and financial elites, conflating the gold-exchange standard with the gold standard, had been overwhelmingly opposed to FDR’s devaluation, fought it, and were aghast at its imposition.  Where, then, did FDR derive inspiration for such an action?

FDR was guided by the unprepossessing George Warren, a professor of farm management and author of a number of highly regarded works in his field.  Ahamad, op. cit. pp. 460-461

As a teacher he was known to be dismissive of theories and made a point of taking his students to working farms. ...  During the 1920s, as agricultural prices kept falling, this expert on cows, trees, and chickens had also spent a decade researching the determinants of commodity price trends.  In 1932, he and a colleague published their work in an extensive monograph entitled Wholesale Prices for 213 Years: 1720-1932, which created enough of a stir that, in 1933, it was issued as a book.  Warren was able to document how trends in commodity prices correlated strongly with the balance between the global supply and demand for gold. ... It was easy to quibble with some of the details of the thesis -- the correlation was not perfect because a variety of other factors, not the least of which were wars, intervened to blur the link.  Nevertheless, it was hard to argue with the general conclusion.  ...

It was Warren's policy conclusions, however, that generated the most controversy.  [R]aise the price of gold -- in other words, to devalue the dollar.  An increase of 50 percent in the price of bullion was no different in its effects from suddenly discovering 50 percent more of the metal.  Both brought about a higher value of gold within the credit system and both would therefore stimulate higher commodity prices.

It sounded simple, but to most of Roosevelt's economic advisers, talk of devaluation was plain blasphemy, smacking of the worst forms of repudiation.

Upon Roosevelt's announcement, on April 18th, to his economic advisers that he was going to exercise the authority slipped in to the Agricultural Adjustment Act to devalue the dollar against gold by up to 50 percent, "hell broke loose in the room," FDR's aide, Raymond Moley, recorded.  His monetary policy advisor, James Warburg, son of the Paul Warburg who had fathered the Federal Reserve System called this action "completely hare-brained and irresponsible." Warburg predicted "uncontrolled inflation and complete chaos."  Budget Director Lewis Douglas declared, "Well, this is the end of western civilization."

It was not the end of western civilization.  The homespun Warren’s pragmatic observations — observations made in what Lehrman Institute founder and chairman refers to as “in the laboratory of history” — had provided the president with the needed mechanism to break the U.S. economy free of the curse of the gold-exchange standard and permit recovery to begin.

Next: The Great Depression, Part II

Previous: The Great Depression, Part I