Mises Wire

These Eight Words Helped Cause the Great Depression

Can the entire story of the worst economic disaster in American history really be told from just eight words in a political party’s platform? In this case, yes.

Here are the fateful words that introduced the second section of the Republican Party’s 1932 platform, right after a waffling plank on prohibition: “We believe in the principle of high wages.”

This was Herbert Hoover speaking. His most cherished economic belief was that wages could not be allowed to fall, and after the Crash of 1929 he vigorously jawboned business leaders to keep wages up. It was not just a question of persuasion. He made it clear that if businesses did not do as he demanded, legislative wage controls would swiftly follow. Business leaders were afraid to defy this edict, and did their best to keep wages where they had been.

The results were utterly disastrous. Since the prices of products and services were in a deflationary downward spiral, the most effective way to avoid bankruptcy would have been to cut wages and other costs. This had been done in the Depression of 1921 with impressive results. That depression, chronicled in an excellent history by Jim Grant, The Forgotten Depression, was over in a year and a half. Nor did workers in aggregate suffer from lower wages. Their lower wages bought the same amount of goods and services at reduced prices.

Confronted with rapidly falling prices following the Crash along with frozen wages, business owners resorted to the only expedient left: massive layoffs. It was their last resort and the only possible way to try to save their businesses. As a direct result of Hoover’s twisted logic, millions of workers were fired and immediately faced penury and even starvation, while those still employed, especially union members and government workers, enjoyed a windfall. Frozen wages with falling prices in effect doubled their real wages.

Murray Rothbard explained all this in America’s Great Depression, but you won’t find it in high school history textbooks. Nor will you read that Franklin Roosevelt just doubled down on Hoover’s tragic policy mistake by enacting wage and price controls. In a celebrated incident, a poor tailor was sent to jail for charging a few too many pennies for pressing a pair of pants.

This was almost a century ago, but the public and politicians still fall for the same twisted illogic. In his 2014 state of the union address, President Obama said that “ I ask America’s business leader to raise your employees’ wages.” In her 2016 campaign, Hillary Clinton said the same thing: “It’s a pretty simple formula: higher wages lead to more demand, which leads to more jobs with higher wages….” Hillary did not explain why, given her premise, she was only asking for minor wage boosts. Why not mandate 100X higher wages? And while she was at it, why not also mandate 75% lower prices. The truth of course is that even modest wage and price controls hamper the free price system and sooner or later lead to unemployment and misery for those least able to protect themselves, the poor and the middle class.

The Democratic Party platform of 1932 also makes for interesting reading. It describes itself as a “covenant” and a “contract” with the American people, claims that voters can rely on its candidate to follow the promised policies, and includes among those policies an elimination of expanding and contracting credit “ for private profit,” a sound dollar, a cut of federal expenditure of no less than 25% together with a balanced budget, and elimination of government activities that could be handled by private enterprise and of subsidies to private interests. This “ contract” was of course immediately jettisoned by FDR.

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