Busting Depression myths
There are no greater obstacles to the formation of sound public policies than mistaken understandings of history. Unfortunately, popular culture overflows with historical ignorance about the economy. Perhaps the most destructive historical myth in America involves the Great Depression.
That economic calamity was not caused by laissez-faire capitalism. Instead — as argued by the late Nobel laureate economist Milton Friedman and his co-author Anna Schwartz — the Depression was caused by the failure of the Federal Reserve to maintain adequate liquidity in the banking system. From August 1929 through March 1933, the Fed allowed the supply of dollars to shrink by more than a third. This was an inexcusable deflationary monetary move that turned what would have been a mild and short-lived downturn into the Great Depression.
Making matters worse were the unprecedented interventionist policies of Presidents Herbert Hoover and Franklin Roosevelt. FDR's New Deal interventions and his increasingly anti-capitalist rhetoric were especially harmful. These interventions and the anti-market climate of FDR's Washington generated what economic historian Robert Higgs calls “regime uncertainty.” Investors were scared of what government might do to their property: tax it excessively, regulate it until most of the value was squeezed from it, or even confiscate it.
In such an economic climate, investment dries up — and, along with it, the creation of jobs. Thus, the Depression wasn't prolonged because of a lack of spending. Rather, the lack of spending was a result of government policies hostile to business and entrepreneurial activities.
Contrary to myth, New Deal policies prolonged and deepened the Great Depression. They didn't end it.
A related myth is that the Depression was finally cured by America's involvement in World War II. While unemployment shot way down and industrial output shot way up during WW II, neither of these occurrences can be read as a sign of economic recovery. That massive military mobilization forced millions of young men into the armed services and employed millions of other people in factories ordered to make munitions and military supplies.
Not only was the U.S., for much of the 1940s, a command economy, it was an economy in which people, despite being employed, were able to consume relatively little. America's involvement in WW II cannot be said to have brought about the kind of recovery people have in mind when they think of a market economy recovering its ability to create widespread prosperity and economic opportunity.
Compelling evidence marshaled by Higgs shows that genuine economic recovery occurred in the U.S. only after FDR was succeeded in the White House by the less ideological Harry Truman and the more market-friendly Republicans won control of both houses of Congress in 1946.
Higgs' account of regime uncertainty and the timing of America's recovery from the Great Depression makes sense. If wartime spending were sufficient to cure a depression, war zones all over the world today would be among the most economically vibrant places on Earth. Egypt and Syria would each be on the verge of stupendous economic booms. Of course, the people of these countries are quite poor and seem destined to remain poor for the foreseeable future. The reason is that economic prosperity grows not from mere spending but, instead, from secure property rights and entrepreneurial creativity.
Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Steelers’ prime-time games shrink attendance at Heinz Field
- Analyst outlines Klein’s supplements, prescriptions
- Woman’s body found in Adams home
- Court validates Highmark Medicare plan that excludes UPMC
- State trooper struck by SUV in Westmoreland faces more surgery, long recovery
- Starkey: Hockey hypocrites, unite
- City Theatre hires James McNeel as new managing director
- Steelers offense puts up gaudy numbers in season’s 1st half
- Bayer profit edges higher, raises forecasts
- At least 2 dead after plane crashes at Kansas airport
- 2 Fayette commissioners oust Ambrosini as board chairman