It was WWII not the New Deal that rescued the US economy

Damien Grant writes:

Few myths are as damaging, however, as that surrounding Franklin Roosevelt and his ‘New Deal’ of the 1930s. Most readers, guided by legend and popular wisdom, will believe that FDR’s big government programmes were responsible for ending the Great Depression. …

Hoover was quick to action, pushing large scale capital works and imposing step tariffs as unemployment reached eight million. This had little effect, so he increased government lending to favoured industries and banks, ran large budget deficits and doubled the debt to GDP ratio from 20 per cent to 40 per cent.

None of it worked and he was evicted from the White House in 1933 after a single term, in favour of Roosevelt.

The new president wasted no time in expanding Hoover’s programmes. The ‘New Deal’ wasn’t new; it merely continued the failed policies of the previous three years and achieved the same result.

By 1933, some four years after the stock market failure the US hit its economic nadir. Unemployment was at 23 per cent. Industrial output was barely half of what it had been and foreign trade was reduced by an appalling 70 per cent.

Roosevelt established a slew of new public works, building dams, roads and federal buildings. He poured new billions into propping up the banking system, introduced deposit insurance and dramatically expanded the federal social welfare net.

For a decade the US ran deficits, raised taxes and had the federal government intervening directly and indirectly into the country’s economic life to an unprecedented extent. Yet by 1939, unemployment remained at 15 per cent and many of those who had jobs were poorer than they had been a decade previously.

Six years on and the New Deal still had unemployment at 15%!

The counter to my argument would be that had it not been stimulus provided by both Hoover and Roosevelt, the economic pain would have been worse. This would be a fair response were it not for a similar shock nine years earlier, in 1920.

This occurred in the aftermath of the Great War and an economic contraction in response to the Spanish Flu. Some estimates have unemployment exceeding 10 per cent and prices falling by as much as 18 per cent. The Dow Jones was almost halved.

With the US economy still adjusting to peacetime production and struggling to accommodate millions of demobbed soldiers, the potential for economic ruin was great.

Yet, by what some economists unkindly refer to as a ‘stroke of good fortune’, President Woodrow Wilson was incapacitated. In response to the looming depression, Wilson did precisely nothing. His successor, Warren Harding, continued this hands-off approach. There was some unemployment relief, but the reaction by the federal government was muted.

The market, that great evil so demonised by contemporary commentators, was left to work out how to re-allocate resources, prices and labour.

Within 18 months the US had recovered and successfully absorbed millions of former troops.

So the best response is allowing the economy to expand in new areas, creating jobs, rather than huge amounts of government spending.