The Great Depression is one of the most important periods in American history. This is because the reasons for the advent, severity and duration of the Depression are entirely misunderstood and because this misunderstanding is used to support bad economic policies today.
If we don’t understand why the Depression unfolded the way it, did we can’t recognize and avoid the same mistakes today.
To further my own understanding of the history of the Great Depression I recently read two books, America’s Great Depression by Murray Rothbard and The Politically Incorrect Guide to the Great Depression and the New Deal by Robert Murphy. Rothbard’s book looks at the events of the 1920s that led to the stock market crash and the subsequent policies of President Herbert Hoover. Murphy’s book also covers these periods, but extends the analysis into the presidency of Franklin Roosevelt.
I started with Rothbard’s analysis. He begins with some economic theory, as he explains the Austrian business cycle theory that he uses in his analysis of the Depression. This analysis points the finger at the central bank, the Federal Reserve, for its manipulation of the interest rate and the availability of credit, both of which send false signals to businesses about consumers’ preferences. Rothbard then points to the low-interest rates and artificially created credit that the Fed made available during the 1920s and notes how this set the stage for the stock market boom and its eventual bust.
With this as the explanation for the boom and bust, Rothbard turns his attention to Hoover. The story that most of us learned in school is that after the stock market crashed, President Hoover, ever the free-market advocate, sat on his hands and refused to intervene while the economy continued its death spiral. Rothbard explodes this myth as he recounts the plethora of ways in which Hoover meddled in the economy, preventing the market from making the necessary adjustments for recovery.
Hoover, far from being the laissez-faire capitalist of legend, actually instituted the first set of federal programs that would form the basis of Roosevelt’s New Deal. One of FDR’s advisers admitted as much years later. Hoover, seizing upon the national crisis to institute programs he had long favored, implored (some might say threatened) businesses to not lower wages, enacted protective tariffs, subsidized farmers to keep prices high and massively increased taxes. The myth of a do-nothing Hoover doesn’t survive after reading this book. This is where Rothbard’s analysis ends.
Murphy’s book begins by developing a narrative similar to Rothbard’s, albeit in a more condensed and easily understood manner. Murphy takes the time to dismantle the competing arguments about the cause of the Great Depression, the under-consumption theory which says that the disparity between rich and poor led to surpluses of goods and the monetarist theory that says that the Federal Reserve didn’t inflate enough. Murphy ably shows the errors in these theories and also devotes a chapter to Hoover’s misadventures.
Murphy then turns his attention to FDR’s New Deal, noting that while it was similar to the programs that Hoover put in place, FDR’s policies and methods took the government’s interventions to a whole new level. Murphy concludes that Hoover felt bound, at least to a small degree, by the constitutional limitations on federal power, but FDR had no use for anything or anyone that got in his way. Murphy also details how Roosevelt apologists have to make unrealistic assumptions in order to make the claim that FDR “got us out of the Depression.”
Finally, he addresses the myth that it was World War II that finally ended the Depression, noting that massively increasing government spending and shipping millions of the most able workers to foreign countries is not exactly a sustainable model for recovery. Murphy explains how the Depression did not actually end until after the war concluded, most military personnel were assimilated back into the marketplace and the government’s economic footprint was scaled back.
One key point that both books make is that depressions were fairly common throughout American history. Both economists point to the recession of 1920 in which unemployment spiked and the economy crashed, but the market was allowed to correct itself and was operating efficiently again within two years. The question that has to be asked, then, is why the Great Depression lasted twice as long as any previous depression in history? One clear answer is the massive intervention in the economy by the government.
Another interesting part of reading these books is in drawing parallels to today. The story of the economy developing an unsustainable boom and then crashing is all too familiar. So is the story of an allegedly free-market Republican president launching unprecedented interventions with the free market, only to have his interventions made to look like child’s play compared to those of a charismatic Democrat.
This is why understanding the Great Depression is imperative. We will continue to repeat these mistakes as long as we are unwilling to learn from history. At least people living in the 1930s could excuse their actions as resulting from the tide of socialism that was sweeping the world. Looking back on the impact of these policies, we today have no excuse for not learning the lessons of history.
I recommend both of these books for anyone interested in learning more about this period, although I would advise most to start with Murphy’s.