“Slouching Through the Depression”
Depression-era tax policies had the unintended consequence of creating a “risk-less economy.”
In his 1933 inauguration speech, Franklin Delano Roosevelt famously told the nation, “Let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
Thanks to Roosevelt’s bold and firm leadership, the United States was no longer in fear of dissolving into revolution or anarchy. But although unemployment declined and the economy advanced steadily throughout Roosevelt’s first two terms, the New Deal failed to completely pull the United States out of the depression.
The median joblessness rate during the New Deal was 17.2 percent, and until the United States entered the war, it never fell below 14 percent. The country was still in the grip of fear, but it was of a different sort. It was a profound fear to take economic risks.
The fact is, the crash of 1929 inflicted deep scars on the psyche of the nation—scars that would not heal until after the war. If Americans were afraid to deposit money in a bank, they were surely in no mood to invest in securities or any other venture that wasn’t as solid as Manhattan bedrock.
Despite all the positives of the New Deal, and there were many, Depression-era tax policies had the unintended consequence of creating a “risk-less economy.” A string of tax hikes and new taxes extinguished the nation’s sparks of innovation.
On top of the Revenue Act of 1932—one of the largest tax increases in American history, which doubled the estate tax, increased corporate taxes by almost 15 percent, and raised taxes on the highest incomes from 25 percent to 63 percent—the Revenue Act of 1935 raised new taxes on higher income levels, corporations, and estates. The Revenue Act of 1937 taxed short-term capital gains as ordinary income. And in 1936, Roosevelt added a higher top rate of 79 percent on individual income greater than $5 million—a rate that was increased again in 1939.
By 1937, the undistributed profits surtax severely restricted the ability of small companies to build up their capital out of earnings, and the large surtax on individual incomes discouraged rich people from investing in new companies.
At the 1936 Investment Bankers Association (IBA) conference, MIT president Karl T. Compton warned that the new surtax illustrated “how government regulation has been directed almost entirely at the curbing of exploitation and has generally ignored and sometimes even penalized attempts toward technical progress.”
The result was that more and more funds flowed into super-conservative investment trusts, and to insurance companies and pension funds. By the 1938 IBA convention, the financial community began to express deep concern about the nation’s atrophied capital markets.
“If investors throughout the land, large and small, refrain from purchasing unseasoned securities of a young industry and refuse to take a business man’s risk, where will new industries obtain needed capital, and would not such a development slow down the economic progress of the country?” asked Dr. Marcus Nadler, a New York University finance professor.