The Great Depression and the New Deal: The Hell of Good Intentions

 

Proponents of the Austrian School are perhaps unique among the various schools of economic thought that exist today. In contrast to the Keynesians (who support government management of the economy), Austrians are most notable for being highly critical of the role that government plays—in their mind—of causing economic turmoil when they become too involved in trying to manage the free market. Almost without exception, Austrian scholars view governments that are interventionist in relation to a nation’s economy as detrimental to that nation’s economic prosperity.[1] As such, it is no surprise that Austrian economists blame the active role of government championed by Presidents Hoover and Roosevelt for prolonging the Great Depression. Evidence does suggest that if the American government had simply allowed the free market to course-correct on its own, the US economy would have stabilized naturally and in a quicker fashion.[2]

A relatively new school of economic thought, the Austrian school rose to prominence in the twentieth century due to the efforts of Ludwig von Mises and Murray Rothbard. Key pillars of Austrian economic theory include the need to protect private property and the legitimacy of contracts. As proponents of free enterprise and entrepreneurial ventures, they do not support taxes, price controls or nearly any types of business regulation.  In short, scholars of the Austrian school advocate for a total separation of government from the free market.[3]

With this in mind, Austrian economists directly blame the start of the Great Depression on government intrusion into the market. Perhaps most significantly, the Federal Reserve Board’s policies throughout the 1920s in regard to managing interest rates on an increasing number of loans led to the creation of a large monetary bubble. If the bubble had been allowed to “pop” on its own, independent of government intervention, the economic downturn would have been minimized and recovery would have occurred quickly. Instead, and in contrast to its intent, the Federal Reserve allowed for the conditions that created a much larger crash and subsequent depression.[4] Once the market downturn began, a lack of confidence in entrepreneurial actions on the part of business owners also dramatically declined, owing in part to a lack of confidence where future profits are concerned.[5]

President Roosevelt’s New Deal, enacted in response to this economic collapse, is also seen by the Austrian school as having exacerbated the worst effects of the Great Depression. One variable to consider is worker output per capita. At the height of the Great Depression, the production rate of the average worker was down 39 percent from expected levels, and by 1939 this number had risen only slightly, to 27 percent below expected performance.[6] This is significant given how many New Deal programs were enacted to improve labor conditions and efficiency.

Proponents of the Austrian School of economics also believe that the Great Depression did not truly end until the after the Second World War, when the industry was finally returned (mostly) to the private sector. Substantial evidence exists to support this claim. To take one variable to identify the health of the economy as an example, in 1940 unemployment rate was substantially higher than it would have been if the regulations on businesses imposed by President Roosevelt’s New Deal had not been enacted. Going further, unemployment – what President Roosevelt would likely identify as the most important problem to address during his administration – never came close to recovering to pre-crash levels. Despite initial improvement due to huge federal works programs, gains made in employment during the New Deal were artificial and temporary. By 1938, unemployment was on the rise again and at a rate above ten percent.[7]

It should also be noted that in the years immediately following the war, growth in private industries increased for the first time since 1928. This can be measured through an examination of Whole Sale Price Indexes, which show a stagnation regarding the total price of all consumer goods throughout the 1930s.[8] The cause of the eventual increase in prices after the war, according to proponents of the Austrian school, was the result of a concurrent decrease in federal government spending at the end of the war.[9]

To the dismay of scholars in the Austrian tradition, much of what was enacted as a result of the New Deal became far more than just temporary programs created to combat the Depression. Not only are a number of New Deal agencies still in effect today (the Social Security Administration being perhaps the best example), Americans are now more comfortable than ever with government playing an increasingly active role in their lives. This was the conclusion reached by the economist Robert Higgs, who noted that that Americans—as result of progressive measures enacted during the two decades prior to the start of the Great Depression—were conditioned to accept the wave of New Deal programs when they were enacted by President Roosevelt.[10] Furthermore, Higgs also identified a historical trend that when the purported need for government action diminishes (i.e., America recovers from a recession), temporary government programs often become permanent. In short, according to the Austrian school over time the United States increasingly has developed a more mixed economy, one where the needle is pointing away from the free market and towards socialism.[11]

Perhaps it is no surprise, then, when one considers the overwhelming size and scope of the US federal government today, where government debt continues to grow at an exponential rate. All of this, Austrian scholars would argue, is to the detriment of the nation’s economy and to its citizens. The roots of this economic transition can be found in the Great Depression and the subsequent implementation of the New Deal.     

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[1] The Mises Institute, “What is Austrian Economics?” Accessed February 15, 2023, https://mises.org/what-austrian-economics.

[2] Harold L. Cole, and Lee E. Ohanian. “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis.” Journal of Political Economy 112, no. 4 (2004): 779, https://doi.org/10.1086/421169.

[3] The Mises Institute, “What is Austrian Economics?”

[4] Eugene N. White, “The Stock Market Boom and Crash of 1929 Revisited.” The Journal of Economic Perspectives (1986-1998) 4, no. 2 (Spring, 1990): 81-2; Raymond Keating, Review of The Politically Incorrect Guide to the Great Depression and the New Deal by Robert P. Murphy, Foundation for Economic Education, December 22, 2010, https://fee.org/articles/the-politically-incorrect-guide-to-the-great-depression-and-the-new-deal.

[5] Hugh Rockoff, Review of A Monetary History of the United States, 1867-1960 by Milton Friedman and Jacobson Schwartz, Economic History Association, accessed February 15, 2023, https://eh.net/book_reviews/a-monetary-history-of-the-united-states-1867-1960.

[6] Harold L. Cole, and Lee E. Ohanian. “New Deal Policies and the Persistence of the Great Depression.”

[7] Gene Smiley, “Recent Unemployment Rate Estimates for the 1920s and 1930s,” Journal of Economic History 43, no. 2 (June 1983): 488, https://www.jstor.org/stable/2120839.

[8] “Wholesale Price Indexes (BLS), by Major Product Groups: 1890 to 1970,” in Bicentennial Edition: Historical Statistics of the United States, Colonial Times to 1970 (Washington D.C.: U.S. Department of Commerce, 1975), 199.

[9] Thomas J. DiLorenzo, “The New Deal Debunked (again).” The Mises Institute, September 27, 2004, https://mises.org/library/new-deal-debunked-again.

[10] Robert Higgs, “Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet phenomenon,” Explorations in Economic History 22, no. 1 (1985): 5.

[11] Ibid., 22. 

Ned Jordan and the Rise and Fall of the Jordan Car Company

 

Through the creation of the Jordan Car Company in 1916 and the business’s subsequent rapid growth, car enthusiast and entrepreneur Ned Jordan became emblematic of the level of success businessowners often found during the Roaring ‘20s. Unfortunately for Jordan, the company’s collapse at the end of decade was also representative of the economic turmoil impacting the country at this time. There are a number of reasons to explain Jordan’s meteoric rise and fall, but the first concerns the initial success of the company being assisted by mutual interests that aligned the federal government and business

Perhaps intentionally so, Jordan founded his car company at a time in the United States when conditions were highly advantageous for business because of the actions taken by the Woodrow Wilson Administration. As historian Gabriel Kolko has noted, President Woodrow Wilson was far more pro-business in his actions than most scholars have traditionally given him credit for. Through the creation of the Federal Trade Commission, Wilson and his political allies sought to create an environment that would alleviate any doubts on the part of business owners—especially smaller ones—concerning their future. In essence, the goal was for prospective business owners like Jordan to feel at ease knowing that “prosperity” was “assured” and that “economic freedom” for their companies would be protected at all costs.1 To assist small businesses, the Commission produced pamphlets containing helpful strategies for how to reduce their operating expenses and to otherwise become more “efficient” in their day-to-day practices.2 

The libertarian Murray Rothbard has argued that the “political capitalism” employed by the government during this time period enabled the most influential of individuals in big business to safeguard their own power. While some historians have disagreed, Rothbard and others have contended that the federal government under the Wilson Administration restrained the dangers that free markets posed to the business class in America.3 By reigning in the variance associated with true free markets, the government officials that championed political capitalism sought to simultaneously protect the interests of big business, while also offering a leg up to smaller companies. Ned Jordan had the acumen and wherewithal to ensure he would benefit immensely from this new environment for businesses.

The Jordan Car Company also quickly became known for its stylish advertisements that made clever use of Ned Jordan’s lyrical and poetic talents. Unlike his competitors, Jordan saw an opening to appeal to a younger crowd of consumers, especially women. Jordan became the first entrepreneur within the auto industry to place advertisements in women’s magazines, and to do so through the use of color imagery that emphasized his cars’ sex appeal.4 These decisions epitomized the strategy Jordan employed for the company in its early years, which would lead to the company’s value ballooning to over three million dollars by the end of 1923.5 Acting on the company’s success, Jordan decided to launch a bold advertising campaign, with the poetic and stylish poster “Somewhere West of Laramie” at the forefront. The image of a woman at the wheel of a Jordan convertible, driving alongside a horse, would become one of the most famous images of the growing car industry during the 1920s. Absent from this advertisement, and most others released by Jordan, was the mention of mechanical and engineering specifications – details that would be more appealing to men. In their place were lines that allude to a woman’s desire for adventure and to be able to do so in a “graceful” way.6 In this environment, and with a decade of sustained financial prosperity, further expansion and continued profits seemed all but assured.

Unfortunately for Ned Jordan, the success of his company would not last. In 1927 he introduced a new, smaller model, the “Luxury Custom,” which he believed would be a hit with consumers. This proved not to be the case. By 1928, lagging sales, overproduction from previous years, and the additional costs associated with making the new model drained the company of its financial resources.7 To explain Jordan’s decision-making, one economic historian has noted that it is all too common for businessowners to feel the need to increase the scale of their operations and to invest in new products, despite the risks associated with doing so.8 While the specific reasons are often unique to the owner in question, for Jordan it is likely he felt innovation in the company was needed in order to meet the projected demands of consumers, and to thus maintain the company’s continued trajectory of growth. Grabbing hold of a new sector of the market before his competitors did also likely motivated Jordan. Moreover, Jordan was also likely concerned—as successful and driven moguls often are—with enhancing his own personal reputation within the automobile industry.9

The start of the Great Depression made the Jordan Car Company’s financial situation even worse, and by 1931 Ned Jordan had no choice but to cease operations. Jordan’s rise to fame and prosperity during the 1920s was made possible by the favorable economic conditions fostered by the federal government, but ultimately the entrepreneur succumbed to the pressure to maintain the company’s financial standing amidst growing competition.

Notes:

 1. Gabriel Kolko, Triumph of Conservatism (New York: Free Press, 1977), 163.

2. Ibid, 162.

3. Robert L. Bradley and Roger Donway, "Reconsidering Gabriel Kolko: A Half-Century Perspective." The Independent Review 17, no. 4 (Spring 2013): 562.

4. Bradford Wernle, “Jordan Put the Sizzle in the Pitch,” Automotive News 70, no. 5666 (1996): 78.

5. Robert Tate, “Remembering Automotive Pioneer Ned Jordan.” MotorCities: National Heritage Area, October 19, 2022, https://www.motorcities.org/story-of-the-week/2022/remembering-automotive-pioneer-ned-jordan.

6. Ibid.

7. James H. Lackey, The Jordan Automobile: A History (Jefferson, NC: McFarland & Company Inc., 2006), 76-77.

8. Alfred D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism. (Birmingham: Harvard University Press, 1990), 16-17.

9. Ibid., 16-17.