Challenging a Depressing Myth

by Don Boudreaux on June 14, 2006

in History

At last, a book that I’ve long awaited has been published: Robert Higgs’s Depression, War, and Cold War (Oxford University Press, 2006).

As compelling, informative, and important as are his chapters on the military-industrial-congressional complex, my favorite chapter is the first: "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War."  (Here’s an earlier version.)

Higgs’s thesis in this chapter, which is backed by data (including interesting data on bond yields from the mid-1920s through the mid-1950s), is that the Great Depression was prolonged and deepened by the "regime uncertainty" created by FDR and the New Deal.  As it turns out, Uncle Sam never engaged in wholesale nationalizations and other whacky central-planning schemes — but no one in the 1930s knew what the future held.  For investors back then to believe that any investments they made in the U.S. might be confiscated or regulated to smithereens was not unreasonable, given the rhetoric of the time and the shift in policy brought by FDR and his "brain trust."

This "regime uncertainty" stifled investment, keeping the economy stagnant.

Higgs’s analysis complements — but adds significantly to — many of the prevailing insights about the Great Depression.  For example, speaking about theories — such as that of Friedman and Schwartz — that focus on the contractionary monetary policy of the era, Higgs says

I do not claim [that these theories] are wrong, only that, even if they are correct as far as they go, they are insufficient.  If property rights are seriously up for grabs, no amount of pumping money into a depressed economy can bring about genuine complete economic recovery [p. xi].

And as for the Great Depression being cured by America’s entry into WWII, Higgs masterfully casts grave doubt on that popular claim.

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Neal Phenes June 14, 2006 at 3:13 pm

I think that James Powell's book on the Depression, FDR's Folly, is a complementary analysis. So many of those temporary programs remain with us. That is enough to make one a skeptic of any government solutions. But that is all recorded in Higgs' other books on the Leviathon.

Don June 14, 2006 at 5:21 pm

Higgs would seem to be arriving at the same insight for early 20th cen. America that Hernando de Soto arrived at for the Third World in general

Swimmy June 14, 2006 at 6:09 pm

I recently had a chance to read GMU professor Thomas Rustici's dissertation about the effects of the Smoot-Hawley tariff on farm exports and, therefore, farm banks. Indeed, Friedman and Schwartz's explanation is insufficient. This, too, adds to our understanding. To me, it all points to a very unstable banking system. But there's clearly something to be said for constitutional uncertainty; it's the same problem that many Sub-Saharan African countries share.

Bill Conerly June 14, 2006 at 6:53 pm

Great topic. My kids' high school history teachers seemed to believe that a major cause of the Great Depression was income inequality. I nearly went ballistic when I heard that.

(Don, Looking forward to your visit to Portland)

Helen's_kid June 15, 2006 at 10:08 am

This is a cheap shot at a GREAT president. You really have to feel for what life was like in the 1930s. Just for the fun of it, go fix yourself a lard sandwich, if you can find any bread or lard. While you're munching your lunch (there won't be any dinner) ask yourself, how did things get this bad? The conclusion you draw is this: private investment does not care about you or your well being. Does the government care? Should the government care? Isn't that the role of government, to care about the welfare of its' people? If not the government than who? Certainly not the private sector. Where was private capital in the 1930s? Was it in some mattress? I think it can be sucessfully argued that a healthy economy requires a mandatory redistribution of wealth. And, government mandates can organize capital. Think about compulsory auto insurance. There's a real no-brainer. Medicare pays for prescription drugs. Pharmaceutical companies have lots of incentive for finding new drugs AND THE CASH. Sure nobody knows what the future holds, but you can bet the farm that government entitlement checks will be received. Free markets are dangerous and when people like Kenneth Lay are at their helm, they are disastrous. The legacy of the "New Deal Regime" is that no one has to endure lard sandwiches. That was something worth waiting for.

Don June 15, 2006 at 10:44 am

"I think it can be sucessfully argued that a healthy economy requires a mandatory redistribution of wealth."

OK, go ahead and make that argument. (Saying "Ken Lay" is not an argument, it is a soundbite) I'd like to see your version of the same claim that has been made so many times throughout the ages and proved false every time. Healthy economies and redistributive policies are opposing phenomena, oil and water, fire and ice, etc. I am assuming you live in the USA, so you live in the richest society the world has ever known, where "the poor" own TVs, air conditioners and, rather than lacking for food, are statistically disproportionately obese. All brought to you be the free market operating in the conditions of classical political liberalism. True poverty around the world exists in concert with lack of such free markets and correlates with the redistributionist policies you advocate.

Swimmy June 15, 2006 at 11:04 am

"Just for the fun of it, go fix yourself a lard sandwich, if you can find any bread or lard. While you're munching your lunch (there won't be any dinner) ask yourself, how did things get this bad?"

And the answer would be, at least during the Great Depression, "The Agricultural Adjustment Act jacked up the price of food at my expense to help a few small farmers."

Now ask yourself, "How can the government, a body made up of several branches and departments across different geographic areas, made up of numerous officials, both elected and appointed, often with opposing ideologies, goals, constituents, and interests to serve be capable of an emotion such as empathy?"

The government does not care. Individuals in the government may care, just the same as individuals in the private sector may care. The question is which, when enabled to act upon that empathy, will do the most good and the least damage.

Helen's_kid June 15, 2006 at 11:50 am

Okay, take the government out of the economic equation. See, you can't. The ultimate outcome of free markets is monopoly, which to my way of thinking is a plantation system. Maybe at its infancy a free market benefits the individual, but at maturity, the wealth of the market is concentrated to the point that it injures the individual and needs redistribution. I don't mean to be anecdotal by using "Ken Lay", but when you need to get your point across, damn, is he handy.

SK Peterson June 15, 2006 at 12:16 pm

The ultimate outcome of government is monopoly, and that appears to be what you're advocating. The only monopolies that have existed in history have done so out of the benevolent imprimis of government.

The free market can concentrate wealth, but the market also creates it and redistributes it all without the need of government and all to everyone's material benefit (even the apparent losers). So, can I take government out of the economic equation? Yes, for just about 99% of anything you, or I, or anyone else can think of.

Kebko June 15, 2006 at 12:25 pm

"The ultimate outcome of free markets is monopoly"

Yeah, just look back at the history of the Dow Jones Index. Powerhouses such as Standard Rope & Twine and National Cash Register… they just kept getting more & more powerful until we were all enslaved to them in order to feed our appetites for rope, twine & cash registers. With only the markets to help us, we were helpless under their unholy oppression.

One other question – are you suggesting that we would rather have a Ken Lay operating government programs than a public corporation? Assuming he's out their doing something, the marketplace seems to be the safest place to have him, doesn't it? At least I could choose not to involve myself with him…correct?

spencer June 15, 2006 at 12:50 pm

The NBER says the 1929 recession ended the first months of Roosevelts term– March 1933. From 1929 to 1933 was the worse of the depression — essentially all of the damage was done during this period. From 1933 untill 1941– before the war started — real gdp grew 90%,the strongest growth of any comparable period except the next couple of years and more then triple the long run trend. The long term growth rate of the US economy from 1900 to 1950 was 3.5% and actual real gdp surpassed this long run trend in 1941.

Yes, employment was weaker then growth in this era — but this was a product of strong productivity — and is what you always see after a period of strong capital spending as we are seeing in the current cycle.

But essentially everything you claim was a product of the new deal actually occured under the Hoover administration. I just find it hard to accept that the new deal caused massive damage to the economy before anybody had ever heard of it. I have seen many people try to explain that — but none of the rationals I've heard were very convincing. So I'm waiting for you to tell me how the new deal of 1933-41 caused the massive downturn of 1929-33.

spencer June 15, 2006 at 12:54 pm

Second, please explain how the massive 1930s downturn ended exactly at the same time Roosevevelt implemented new policies
and now some other time.

Or are you going to claim it was just some strange coincidence.

spencer June 15, 2006 at 1:03 pm

Third — how do you expect me take an account of investmetn seriously that completely ignores any impact of capacity utilization in the decision making process?

If you use capacity utilization it essentially explains all the weakness in capital spending that Higgs attributes to piolitical factors.

Swimmy June 15, 2006 at 1:18 pm

If you're asking for the cause of the depression, look no further than Smoot-Hawley. The trade war it initiated reduced agricultural exports immensely by 1933. Combined with the Fed's ridiculous monetary contraction, this meant devastation for farm banks. (If you examine the countries hit hardest by the depression, the bank failures almost always began at farm banks.)

Hoover's fault? Partially, and I consider him a bastard. But that is insufficient to explain the length of the Depression.

You argue that unemployment "was a product of strong productivity," but we actually have a theory that explains both high productivity and high unemployment–unionization and minimum wages encourage employment of only high-productivity workers. And Higgs presents us with a theory to explain the duration of low investor confidence–a theory which clearly builds upon the institutional explanations for economic growth which have gained increasing popularity in the last 25 years. Combined, we have an explanation for the cause and duration of the Depression, including rising production but varying unemployment during the recovery period. I find this much more convincing than the idea that aggregate demand and/or consumer confidence were too low for that entire period.

Helen's_kid June 15, 2006 at 1:33 pm

"One other question – are you suggesting that we would rather have a Ken Lay operating government programs than a public corporation?"

Ken Lay is running the government programs and publilc corporations. That's primarily your complaint, I think. However, I don't think you realize how much benefit you derive from such an arrangement. For instance, you may operate a small grocery and every month Ms. Smith And Mr. Jones come in with their USDA foodstamps and spend them in your store. It isn't fair, really. There you are busting your butt working overtime and they get a free ride, AND you have to pay taxes to support them. Yet, without foodstamps you wouldn't do much business, sales would be flat. Without resources, Smith and Jones may look at you as prey. Hence, increased security, inability to sleep and deep distrust pervade your life. Worst of all there is an economic stagnation that no amount of advertizing can overcome. That's a depression, but at least your market is free. Tell yourself that can never happen. Well, as long as there are foodstamps that can never happen.

Let me pose a question to you. Where is it in America that you can own a piece of land and support your ownership by not paying taxes, other than a church. There is no such place. Because America is about moving. Stagnation is death. The Great Depression tought us that. There is a saying in California's Death Valley: "Hike or Die" The fact that you're in a rat race is far better than the alternative.

Irreligious June 15, 2006 at 1:51 pm

"I think it can be sucessfully argued that a healthy economy requires a mandatory redistribution of wealth."

Actually, this is true, at least partially:,,menuPK:477658~pagePK:64167702~piPK:64167676~theSitePK:477642,00.html

Here you have the link for the World Bank "World development report 2006" where it is stated just that

Kebko June 15, 2006 at 2:11 pm

It looks to me like that link talks about equitable opportunities & economic freedom, not redistribution of wealth.

True_Liberal June 15, 2006 at 3:35 pm

The most effective "redistribution of wealth" is that which comes about through job opportunities and incentives to better one's value to an employer (or customer, if you will). In other words, socioeconomic mobility.

Noah Yetter June 15, 2006 at 3:54 pm

"This is a cheap shot at a GREAT president."

Worst. President. EVER.

The most cursory study of the Depression reveals how nearly every policy FDR undertook made it worse. His expansion of the size and scope of the federal government, at the cost of our prosperity and liberty, was permanent. No president before or since has done more damage to this great nation.

spencer June 15, 2006 at 4:04 pm

Swimmy –Where did I say anything about demand in my comments? I talked about cap use, not demand.

SK Peterson June 15, 2006 at 7:40 pm


I almost agree with you, but I would put Lincoln right up there at numero uno, with FDR a close 2nd, followed by Wilson and Teddy Roosevelt in fourth. All four were over-regulating, centralizing, destructive presidents either domestically, internationally, or both.

SK Peterson June 15, 2006 at 7:48 pm

Spencer –
I don't follow what you're arguing. Capacity utilization fell, in part due to the previous massive injections of credit into the economy in the 20's. The credit influx made sure there was overcapacity in certain industries, but the policies of the FDR and Hoover administrations compounded the problems by prolonging the correction and according to Higgs adding to the uncertainty in the market.

Trumpit June 15, 2006 at 7:53 pm

At least most historians agree than WWII was the event that lifted the U.S. out the Great Depression. To me, the idea that war is GOOD for an economy is rather amazing. Death and destruction never had it so good. The reason, of course, was that the U.S. mainland didn't suffer the devastation that the rest of the participants in the world war did. Nuclear missiles have changed all that. A worthless country like North Korea can devastate a big and rich country like the U.S. almost instantly by launching its missiles at every important city. In return we can annihilate them. Big deal. The words 'nuclear blackmail' comes to mind.

eric June 16, 2006 at 11:30 am

helen's kid:

I am supposed to be greatful as a shop owner that these people are "shopping" in my store with food stamps paid for by my taxes? I don't have to worry about becoming their "prey"? its federally mandated that i am their prey — they just take the stuff off my store shelf and out of my paycheck. I have job, maybe, the food stamp people should get one too.

I do think taxes are necessary — in order to pay for legal system and police, to prevent Ken Ley and other criminals from stealing my property, to enforce property rights and defend the nation.

But redistribution is just theft.

Noah Yetter June 16, 2006 at 11:30 am

SK, I agree. It is hard to decide whether FDR or Lincoln is #1 worst.

My pick for #1 best is Grover Cleveland.

Nacim Bouchtia June 16, 2006 at 11:45 am

Helen's kid is the unintentionally funniest person on the Internet.

spencer June 16, 2006 at 12:39 pm

Sk — what i am arguing is that the over capacity created by the 55% drop in industrial capacity from 1929 to 1933 — at the bottom industrial production was actually smaller then in 1921 — is what was responsible for the weak investment spending. When Higgs argues that political uncertainty caused the weak investment he is misplacing the cause — the cause was over capacity, not political uncertainty.

Why should anyone build a new plant when half of the existing plants were sitting idle? But higgs argues that business did not build new plants because they were afraid that Roosevelt would do something he never did. Do you really expect any rational person to buy this argument.? If you expect this stupidity to be believable at least make some attempt to quantify that some ammount of the investment shortfall stemmed from excess capacity and the remainder was because of political uncertainty.If you do that then we will have something worth discussing rationally.

spencer June 16, 2006 at 1:28 pm

Imagine — it is 1936 and you are the owner of a steel company. Half of your existing blast furnaces are sitting idle. The price you get for what steel you can sell is some 40% below what it was in 1929. Your revenues are barely covering your variable costs and you are in serious danger of defaulting on your bank loans. At least your banker is only requiring you to cover the interest payments and recapitalizes the principle for you to repay at some future time.

You take all this into consideration and decide not to build a new facility because Roosevelt might nationalize it. None of the above factors enter into your decision. If it wasn't for that bastard president you would build the biggest steel mill anyone ever saw and the point that no one would lend you the money to build it does not matter.

this is the argument Higgs is asking me to buy. You can not be serious.

TGGP June 16, 2006 at 1:32 pm

This seems as good a place as any to plug "The Myth of Natural Monopoly":

"Wartime Prosperity?" is also an interesting read:

Helen's Kid, there is nobody here disputing the idea that poverty is bad. What has been stated that the policies enacted by FDR were harmful and prolonged the depression.

Aaron Krowne June 17, 2006 at 8:45 am

I agree with most of the causes of the depression pointed out here. I've read Jim Powell's book and it is very good; I wouldn't go so far as to say the US didn't nationalize industry, because it came really damn close.

I'd also like to add an argument Rothbard made: that the depression was partially the result of of a power struggle over the Fed in the executive branch, with the Rothschild/FDR camp gaining power over the Morgan camp. Morgan had been unapologetically for providing liquidity, but this policy ended at the worst possible time when FDR changed the regime at the Fed. It took a while for control of the Fed to pass to more of a "balance of power" and all the banking interests to realize that perpetual liquidity would be in their best interests.

Logger June 19, 2006 at 1:51 am

Cleveland probably was the best and Roosevelt and Lincoln were poor in some ways but it is not fair to not give them credit for the way they carried the country through their respecitve wars. Even though both shredded the Constitution they had their reasons. Clinton and Carter had no truck with the Constitution either but were too inept to run roughshod over it.

As for Helen's Kid, he has to be putting us on, nobody could be that dense. Someone should get him a list of the companies that the Justice department has pursued over the past 100 years for monopolistic practices.

Keith June 19, 2006 at 9:29 am

Quote from Helen's Kid: "For instance, you may operate a small grocery and every month Ms. Smith And Mr. Jones come in with their USDA foodstamps and spend them in your store. It isn't fair, really. There you are busting your butt working overtime and they get a free ride, AND you have to pay taxes to support them. Yet, without foodstamps you wouldn't do much business, sales would be flat."

You make we want to run right out and start breaking windows all over the country.

Bill June 19, 2006 at 1:58 pm

Interesting theory. What about the FDIC? Was that one of the regulations that would turn investments into smithereens? I do concede that all of the acts passed were not good, that many were wasteful and inefficient, and even that it may have been possible for America to rebound faster without them. However, I also think that when people are starving (as they were), and when others are burning food to increase demand (as they were), and where veterans are massacred in the captitol city (as they were), and where rich people hire private armies (pinkertons) to break up strikes, and where those private armies shoot women and children who are stiking with the men (as actually happened) then if the government doesn't take some dramatic action, even if it is "wacky," it could be overthrown very easily. In other words, were it not for all of FDR's socialist tendencies, we may have become a socialist country. This is something I think I a lot of people overlook.

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