The Great Depression ranks as one of the most misunderstood periods of history. For that, we can thank biased historians who for generations have favored activist government, along with Keynesian economists who never understood how the economy works.
Since the last few months of 2008, the Great Depression has been thrust back into the national debate about economic policy. The deepest recession in more than six decades, including a credit meltdown and steep decline in production, has generated serious speculation about “another Great Depression.” If so, what is needed to avoid it? And who or what was to blame for this mess?
Let’s begin with questions about the causes of the Great Depression and how it eventually ended. The conventional idea is that unbridled capitalism in the 1920s crashed to earth, laissez-faire advocate Herbert Hoover failed to take needed action, and then Franklin Roosevelt and his New Deal rescued the nation. For many years that has been the accepted story.
Robert P. Murphy’s The Politically Incorrect Guide to the Great Depression and the New Deal joins a growing list of books based on sound economics and history that, in recent years, have questioned the accepted narrative. Murphy’s book—a quick, easy read—provides a valuable counter to wrongheaded conventional wisdom, while offering some points for debate among free-market economists.
As for the causes of the Great Depression, Murphy makes clear that it was not capitalism run amok but rather bad public policy. The debate within free-market circles is which policies were most responsible. Murphy favors the idea that it was monetary policy being far too easy in the 1920s, thus creating a bubble that inevitably had to burst. That puts him in the seemingly awkward spot of arguing that the 1920s were about both real prosperity (helped along by substantial tax relief during the Coolidge administration) and false prosperity. It also leads Murphy to declare that given “the unsustainable boom when Herbert Hoover took office, . . . a bust and the ensuing small ‘d’ depression were unavoidable, no matter what Hoover did in office.” That’s a debatable point within the free-market community.
Murphy notes that many free-market advocates have other ideas on the Great Depression’s causes. Unfortunately, he fails to give a full hearing to those who point to other poor policy choices, namely, the Smoot-Hawley Tariff, which acted as the trigger, followed by grossly misguided tax, regulatory, and spending policies.
Once beyond the debate over what sparked the Depression, Murphy does excellent work debunking many myths about the era. For example, he makes clear that Hoover was not a free-market stalwart but instead a big-government Republican. He criticizes Hoover’s labor and wage, trade, immigration, spending, and tax policies, which all worked to deepen the Depression. Murphy highlights Hoover’s farm-support programs, public-works spending, and Reconstruction Finance Corporation as examples of “Hoover’s New Deal Lite.”
Murphy also does yeoman’s work in explaining the many ills of Franklin Roosevelt’s policies, showing how they made things far worse, particularly highlighting two important points that often have gone unnoticed.
First, Murphy observes the dearth of private-sector investment during the Depression, and ties that to the uncertainty created and costs imposed by FDR. Second, he notes that most previous recessions or depressions in “U.S. history were over within two years, and all of them within five.” So the question is, “Why did the Depression last so long?” If one honestly looks at the history and the economic and policy facts, the clear answer is that Hoover-nomics and FDR’s New Deal created the longest and deepest economic downturn in U.S. history.
That brings us to the present. Murphy argues in his closing chapter that President Bush was Hoover-like in his big-spending ways and his complete abandonment of free-market principles when confronted by the credit mess at the end of his administration. And like FDR, President Obama has offered an unprecedented agenda of government expansion.
Murphy wonders if Obama’s New Deal “will finally sink the American economy.” At best the Obamanomics agenda of higher taxes, increased regulation, and a vast expansion in government spending seems destined to result in lackluster economic performance.
As Murphy notes about the New Deal and the wartime economy, “True prosperity did not return until demobilization, when the federal government relinquished its stranglehold on the American economy and once again allowed private investors and entrepreneurs to direct resources.” Currently, there is no sign that anyone in the White House understands the economics of FDR’s or Obama’s New Deal. So the stranglehold tightens.