The 1930 Wall Street Crash, Roosevelt, Keynes and the importance of institutions

Let’s not copy the nefarious New Deal that delayed the exit of the depression

Decades ago the study of economics has stopped focusing only on fiscal balance, monetary policy, protectionism and other strictly economic policies and began to focus on the relationship between institutions and economic growth. Hayek in The Constitution of Liberty (1960) makes a major breakthrough in this regard by completing it with Law, Legislation and Freedom, three volumes published in 1973, 1976 and 1979, does a great work that shows the need to limit the power of the state so that there can be prosperity and freedom.

But other authors, such as Mancur Olson, also focused on the relationship between economic growth and institutional quality, particularly in the rise and decay of Nations.

The case of the 30′ crash and the New Deal is an emblematic case in which few have noticed the importance of institutions to get out of economic crises. The entire debate has been limited to determining whether the New Deal was successful and whether Keynesian policies influenced the exit from the crisis.

In general, it is believed that the New Deal was a purely Keynesian recipe for increased public spending financed by monetary issue. The reality is that the New Deal was something much more complex than the increase in public spending, although it is proven that Roosevelt was in personal contact with Keynes and his ideas that he later turned to the General Theory in 1936. Apart from the letter that Keynes published in 1933 on the need to increase aggregate demand and regrets the fiscal discipline proposed by Roosevelt, in 1934 Keynes had a meeting with Roosevelt and explained his ideas to increase public spending and fiscal deficit. In a letter from Keynes to Roosevelt dated February 1, 1938, he makes reference at least twice to the meeting that was 3 and a half years ago, that is, he is referring to mid-1934, a meeting that is confirmed in the draft of the letter prepared by the Secretary of the Treasury of the United States to respond to Keynes, letter that is dated March 3, 1938 and refers to that meeting in mid-1934. The fact is that Roosevelt knew the ideas of Keynes before he published them in the General Theory in 1936, but discarded them because his presidential campaign in 1932 was based on fiscal equilibrium. Roosevelt considered that the fiscal balance was going to bring confidence, more investments and improve the situation of the economic agents in order to get out of the recession. we should recall that when Roosevelt took office as president in 1933, unemployment was at around 25% and that in 1933 the Great Depression had not completely ended either. The economy had improved somewhat but entered into a recessive process again in August of that year, in my opinion, because of the multiple regulations imposed by Roosevelt. Moreover, Roosevelt begins to follow to some extent the ideas of Keynes and begins to increase public spending, but not in the magnitude suggested by Keynes. Some economists have misread the fiscal data of that period believing that there was a fiscal surplus. Error, the budgets that Roosevelt sends to the Congress increased the public expense with fiscal balance, but without including the destined expenses to social aid and stimulus to the work. A kind of primary deficit of current Argentina. They did not contemplate a part of the expenses and for that reason, it gives them fiscal surplus.

Figure 1

Even Roosevelt arrives to affirm, after making his political campaign in favor of the fiscal balance, that: “Having fiscal balance in 1933 or 1934 or 1935 would have been a crime against the American people… When the American people suffered, we refused to go over to the other side and humanity prevailed.” For Roosevelt, being a humanitarian happened to mean having a fiscal deficit.

But the New Deal was not just public spending, Roosevelt also prohibited the possession of gold. It is as if today Argentines were forbidden to have dollars. The Agricultural Adjustment Act was established by which agricultural producers were subsidized so that they did not produce. This subsidy was financed by the transformation tax. A tax that had to be paid by those who bought agricultural products as inputs. The one that bought cotton to make a shirt, paid the tax to the transformation so that the one that produced cotton produced less via the subsidy that the state gave him with that tax.

The National Industrial Recovery Act was also established, which regulated industry activity, hours of work, salaries, etc. And, in addition to the protectionism imposed, the National Recovery Administration was created to regulate the entire economy.

All this tangle of regulations that made up the New Deal drowned the economy and led to a number of lawsuits questioning its constitutionality. At first, the Supreme Court of Justice accompanied the government of Roosevelt but reached a point where he said enough.

Here it is worth clarifying that Hoover, the president who preceded Roosevelt, left a CSJ composed of four conservative members, two moderates and three “liberals” (here we would say progress), following the work of Antonia Sagredo Santos published by the Complutense University from Madrid. That is, Roosevelt did not have the entire Supreme Court against. But in 1935 the CSJ began to stop the avalanche of unconstitutional regulations and in January 1936 he turned the heart of the New Deal that was in the Agricultural Adjustment Act for the case of the United States. Butler, known as the Butler case. In essence, the CSJ declares unconstitutional the transformation tax for coercing liberty, say extortive for those who would not comply with the government’s orders to produce less, advanced on the rights of the states transforming the US. in a unitary government and the power that the Executive arrogated to exercise legislative powers.

When the Agricultural Adjustment Act fell, the National Industrial Recovery Act and the National Recovery Administration fell short because they were based on the spirit of the first. This declaration of unconstitutionality was liberating the economy from the drowning of the regulations and, can be seen in figure 1, that already in 1935 with the first limitations and in 1936 with the brake to the tangle of controls of the New Deal, the economy recovers confidence.

Obviously, Roosevelt wanted to remove part of the CSJ, something that reminds the Kirchner, for opposing its special powers delegated by Congress, something that the CSJ considered inadmissible in a state with a division of powers. Roosevelt’s onslaught against the court had no support even in his own party, the Democrat, and this helped rebuild confidence.

Then the president wanted to neutralize it by expanding the number of members to have an addicted Court. As he did not achieve this goal, Roosevelt tried to get rid of the judges of the Court by reducing the age of its members to 65 years. Nor did this strategy work. The firmness of the CSJ and the functioning of the institutions in the United States allowed it to recover its economy after having confiscated deposits and prohibiting the possession of savings and establishing the most absurd regulations in the Moreno style, together with the fiscal deficit. That is to say, the economic barbarities that were made in the New Deal, which we copied with great enthusiasm, were held back by the institutional functioning. In short, the spirit of the founding fathers prevailed when it came to respecting the right to property and the division of powers.

My impression is that it was not the New Deal, nor the Keynesian recipe that Roosevelt had known since 1934, nor the Second World War, which allowed the United States to exit the depression of 30. As can be seen in figure 1, From the moment the CSJ declares unconstitutional the laws that were the heart of the New Deal, industrial production consolidates its recovery.

In short, let us be clear that for Argentina to emerge from its long decline and avoid a new economic crisis, economic policies consisting of institutional quality cannot be separated. And the latter does not depend on a political party, it depends on the political leadership as a whole that must accept that there must be long-term public policies in which the power of the state is limited so that it does not violate property rights or stifle the capacity innovation of Argentines with ridiculous taxes and absurd regulations.

Let’s not copy the nefarious New Deal, which delayed the exit of the depression. Let’s copy the good part of the United States: the empire of institutions that prevailed over the regulatory madness of the New Deal.

Written by Roberto Cachanosky