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Economics Matters: The Great Depression (Vol. 117)

Bad Economic Policy = Bad Economic Results

Last week we discussed how good economic policy led to good results during the Roaring 20’s, See Facts, No Spin #116. The 20’s was followed by the exact opposite during the next decade - The Great Depression.

President Hoover took office in 1929, times were good coming out of the Roaring 20’s. It didn't last long, the stock market crashed in October of that year. This was followed by a recession. In late 1930 the economy was recovering in a normal manner. Then the government went into action.

Against the advice of most of his economic advisors, Hoover pushed through the Smoot Hawley tariff act, increasing tariffs dramatically on thousands of items. Free trade is an important part of thriving economies. But this was passed and reciprocated by other countries against us. International trade dropped dramatically and so the Great Depression began in an economy that was recovering, into one that was declining further.

During Hoover’s presidency, taxes were increased to 63% and spending by 47%. It was worse than it sounds as this weak economy had entered into a deflation period. This did not serve Hoover well and he was soundly defeated after one term.

President Roosevelt came into office in 1933. Unfortunately, Franklin Roosevelt basically continued Hoover’s policies. He increased the top tax rate to 77 percent, and then to 79 percent. That was misguided, of course, but his biggest mistake was probably his decision to continue Hoover’s approach to spending. Over the next eight years, as shown by this additional chart, the burden of government spending doubled. Perhaps good intentions, but terrible results.

During this period of high taxes and spending, taxable income from the high income group dropped from 6 billion when tax rates were low in the 20’s to 2 billion when tax rates were high in the 30’s.

Some people think Hoover/Roosevelt policies were successful, but knowing the results and the Great Depression, this is a ridiculous misinterpretation. The economy started recovering when tax rates and spending were lowered in the late 30’s.

Henry Morgenthau, President Roosevelt’s Treasury Secretary, admitted to the House Ways and Means Committee in April 1939: “Now, gentleman, we have tried spending money. We are spending more than we have ever spent before and it does not work… I say after eight years of this administration we have just as much unemployment as when we started…and an enormous debt, to boot.”


Of course there were many factors entering into what happened during this period that are beyond the scope of this summary. But one thing is clear. Fiscal policy - taxing and spending - are the key elements to how an economy functions. Do we want a sound , growing economy, or slow, depressed economy? Of course we want a sound prosperous economy where the standard of living is increasing.

To grow and prosper, we need to contain the size and spending of the government, with commensurate lower tax rates. When you look at the facts, it becomes quite clear.

Formula for Growth:


Sadly, DC has not figured that out. Spending is totally out of control and the debts have soared beyond comprehension, actually growing to levels which endanger our very survival.

So it is time for us citizens, the ‘voting public’ to send them a message: FIX THIS MESS BEFORE THE DEBT BOMB BLOWS!


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