The "Mysterious" Great Depression?

by Don Boudreaux on October 11, 2008

in Current Affairs, Financial Markets, History, Monetary Policy, Myths and Fallacies, Politics, Prices, Property Rights

This insightful op-ed by West Virginia University banking theorist and historian George Selgin (dispensing the myth of the alleged ‘mysteries’ of the Great Depression), although written more than a year ago, is especially relevant today.  Here’s a key paragraph:

Paradoxically, perhaps, the fact that orthodox economics has a good
deal to say about how the Great Depression happened itself suggests
that there is after all something puzzling about the Great Depression.
What’s puzzling is not that the depression happened, given policies
that were resorted to, but that such destructive policies secured wide
support despite their often readily-predictable, adverse consequences.
But to call even such perversity a "mystery" is to be guilty of
hyperbole. After all, politicians are rewarded for appearing to "do
something," and not for their command of "abstract" theories.

Comments    Share Share    Print Print    Email Email

  • I think the clue to the Great Depression is that the FED was established 13 years before the crash which the FED was created to prevent.

  • Mr. Econotarian

    I think the real clue to the Great Depression is that countries that went of the Gold Standard earlier tended to do better.


    The NRA, etc., was a waste, but clearly macroeconomic policy was lacking. Some argue Japan's slow macro response to their real estate bubble bursting also helped lead to their "lost decade".


    Although clearly assets bubbles were important features of the Great Depression, "the lost decade", and whatever we are going to call the current crisis.


    I'm torn on whether the Fed should use macro policy (or other regulation) to pop bubbles. It sounds nice (because assets are, in a way, a form of money - I might not have any money in my bank account, but who cares if I can sell my house for $1M).


    However I really, really doubt the Fed's ability (or anyone else's) to properly predict and optimally pop asset bubbles. Simple monetary inflation is a bit more straightforward.

  • The political class always blames 'the market' or 'greedy businessmen' to deflect blame from the real culprits...themselves.

  • Douglas

    is it possible to conceive of a policy whereby deposits are guaranteed - but banks are not.


    i.e. if your bank goes down and you lose your bank balance the govt. will give you the money directly based on the failed banks records.


    The idea is a policy response that is money supply neutral and in some way palatable for voters.


    Or is something like this impossible?

  • vidyohs

    muirduck stands revealed as a closet libertarian....well almost.


    "It's my belief that if you have good efficient governance and rules you will spend less on it then we do and stimulate the economy more then we currently are doing.

    Posted by: muirgeo | Oct 12, 2008 5:08:40 PM"


    muirduck, if you'd just have stopped there you would be guilty of having said something intelligent for once in your life.


    But, typically you let your fingers run away with your stem cell and go on to make a fool of yourself....again.

  • Well George, you do persist in an idealistic vision of 'good government', etc.


    I do think that, as a visitor to a site devoted to free markets, you certainly seem to entirely disregard our reasons for that devotion and are likewise immune to arguments based on human nature and systemic incentives in regarding your democratic idealism with skepticism.


    You appear to be unable to demonstrate any substantive comprehension of the libertarian and Austrian perception of markets and why they should be free of political interference and when you attempt to describe our perspective, you always deliver your own caricature of it. A caricature we libertarians are quite familiar with as we have been getting that from the left for the 30 years I've identified myself as libertarian.


    OTH, those on the right have an entirely different caricature of libertarians.

    In 1976, the National Review published an article that demonstrated that libertarians were communists. Somewhat hard to square with our support for private property, but as I said, a caricature.


    Now that the GOP is squarely in the socialist camp, they just call us "unserious" because or our opposition to military adventurism and flakes for our critique of the central bank.


    But can you do?

  • When you spend money on the military and wars and cronyism and ignoring the need for rules your country goes broke.


    Wars under Democrats:


    FDR/Truman - WWII

    Truman - Korea


    Kennedy/Johnson - Vietnam

  • Muirgeo,


    "FEMA is a great example. Under Clinton it was supported and worked great. When Bush put crony's in charge it was a disaster."


    Why do you think Democrats don't put cronies in charge? Just because they say so? (You'de be surprised!).


    "There are some very competant and hard working people that work in the government. They do their jobs well and with pride. They aren't looking gto make a fortune but just to have a fair deal and stability."


    Well you could argue that the Nazis were highly efficient, did their job well and with pride, etc...What you say doesn't give me comfort.


    "Government is being effecient when it's not running up a huge debt and when it's regulating markets well to make them competitive and fair."


    Agreed on the first part about debt. Not so sure the government knows how to do the later part (as the current crisis demonstrates)


    "So the numbers are pretty dramatic. If you read Larry Bartels "Unequal Democracy" you see we have lower unemployment,greater growth and less debt/gdp with Democratic leadership."


    Numbers get thrown around by both sides. Who should I believe?


    "Bottom line is the modern democrat believes in competitive markets and in effecient government while the Republicans do not believe in government except as a cash-cow to raid and make themselves wealthy with."


    What people believe in I don't know. I'm more suspicious about what politicians believe in because there's a conflict of interests there. If it was that simple, the catholic church would have no corruption.


    "When you spend money on the military and wars and cronyism and ignoring the need for rules your country goes broke. When you spend money on roads, the electricity grid and health care and you set up fair rules your country prospers. "


    Ok. But in my state it's the Republicans who keep spending money on roads, and Democrats have waged wars before, very long ones for that matter. So it doesn't seem to be so clear cut.

  • Hans Luftner

    I think a great idea would be for some one to start up a national organization where people from both sides join and pledge not to vote for either of the two parties in all elections.


    They call those "third parties."

  • muirgeo

    Have you ever heard of the saying "divide and conquer"?


    Posted by: Unit



    Yep. I agree the two parties do just that. And unless the democrats come in and take some steps towards ending the incumbancy autocracy and helping set up a more representative system I will stop voting for them as well.




    I think a great idea would be for some one to start up a national organization where people from both sides join and pledge not to vote for either of the two parties in all elections.

  • muirgeo

    What exactly is 'efficient government'?


    How do you determine if government is being efficient?


    Posted by: Sam Grove


    FEMA is a great example. Under Clinton it was supported and worked great. When Bush put crony's in charge it was a disaster.


    There are some very competant and hard working people that work in the government. They do their jobs well and with pride. They aren't looking gto make a fortune but just to have a fair deal and stability.


    Government is being effecient when it's not running up a huge debt and when it's regulating markets well to make them competitive and fair.


    So the numbers are pretty dramatic. If you read Larry Bartels "Unequal Democracy" you see we have lower unemployment,greater growth and less debt/gdp with Democratic leadership.




    Bottom line is the modern democrat believes in competitive markets and in effecient government while the Republicans do not believe in government except as a cash-cow to raid and make themselves wealthy with.




    When you spend money on the military and wars and cronyism and ignoring the need for rules your country goes broke. When you spend money on roads, the electricity grid and health care and you set up fair rules your country prospers.



  • I've been reading Lawrence Reed's account of the Great Depression.

  • Muirgeo,


    Democrats have been in power too, for a very long time. They've started wars too, created failing bureaucracies too, semi-privatized Fannie, etc...This partisanship of yours is getting really silly. In fact the current partisanship on both sides is sounding less and less convincing, especially in view of the current crisis. With that I don't mean that bi-partisanship is the way to go. In fact, if partisanship is bad, bi-partisanship is twice as bad, as the etymology indicates. Have you ever heard of the saying "divide and conquer"?

  • It's my belief that if you have good efficient governance and rules you will spend less on it then we do and stimulate the economy more then we currently are doing.


    What exactly is 'efficient government'?


    How do you determine if government is being efficient?


    How does turning your value (money) over to politicians empower people?


    It may be clear that Republicans are worse than Democrats, but that's not saying much.


    Do you think a central bank desirable?

  • muirgeo,


    You are exactly the type of voter Mencken was talking about when he said that under a democracy, voters get what they deserve, good and hard. ;)


    Do you honestly think Barack Obama is going to fire all the civil servants hired under Bush's tenure? Do you honestly think that there will be significant changes in the treasury department? Do you think that he's going to fire all the generals and appoint new ones? Where are these selfless paragons of good governance supposed to come from? You think they're going to come from Ivy League schools? The Pac 10? The industries they regulate? From the congregations of baptist churches?


    Will there be some test?


    How are they going to do better if they don't have to fear economic losses anymore?


    To me, there is only one upside of the coming years of Democrat dominance of the government: watching their supporters confident predictions - that somehow government officials with their guns can bring about a paradise that peaceful commerce cannot - turn to ash in their mouths.


    And this time, unlike the great Depression, the Democrat president wont be able to blame the failures of his policies on congress. This time, he won't be able to drum up a war in a desperate attempt to mask his failures.

  • muirgeo

    Unit,




    It's my belief that if you have good efficient governance and rules you will spend less on it then we do and stimulate the economy more then we currently are doing.


    The Republicans sell out the government to their crony's, they spend more and they make it less efficient. Heck their whole M.O. is to prove that government doesn't work and they are very good at proving their point. But when it is more competently run you you get more for your money and the economy grows better.


    Right now it's too bad that we have a 2 party system but the facts are clear that the democratic party is far more effecient.

  • I thought black and white IS pretty much how libertarians see everything. Nuances, shades of grey... color.... nahh who needs em?


    What you think doesn't necessarily correspond to reality.


    The usual perception is that conservatives/republicans/theocratic moralists see everything as black and white and that leftists/liberals/progressives see everything as some shad of gray.


    Libertarians (at least this one) realize that the real world contains grays, blacks, whites etc.


    We also see that your unidimensional perception of politics forces you to constrain libertarians in bipolar opposition to yourself.

  • By the way Muirgeo, you keep on bringing up the 50s and 60s, but what do you make of the fact that government spending was a much smaller share of the economy then than it is now? And yet you somehow favor increasing spending to get us back to that golden situation.

  • muirgeo

    There's so much talk of Great Depression these days that when I go outside I keep on waiting to see everything turn black-and-white.


    Posted by: Unit


    I thought black and white IS pretty much how libertarians see everything. Nuances, shades of grey... color.... nahh who needs em?

  • The Dirty Mac

    "There's so much talk of Great Depression these days that when I go outside I keep on waiting to see everything turn black-and-white."


    Another fine mess they've gotten us into.

  • Deflation meant you could make a profit with your mattress stuffed with paper money. Forget the risk of investing in industry and productivity!


    Usually people spend more when the apparent price of goods drops. Deflation is equivalent to having more to spend


    Despite the existence of very safe investment opportunities, people still take greater risks, because they desire to be even better off.

  • There's so much talk of Great Depression these days that when I go outside I keep on waiting to see everything turn black-and-white.

  • People did indeed try to hide their money durign the Great Depression, but that was not necessarily due to deflation. Nor was it really bad.


    The lack of capital investment was really due to the regulatory uncertainty. FDR kept changing the rules of the game. Make an unlucky investment, and the government could ruin you.


    Furthermore, the ruinous tax rates of the Roosevelt era meant that saving was effectively impossible.


    As far as people stuffing bills in mattresses killing the economy, don't make me laugh. Let's say a guy takes his money out of the bank, and stuffs it into his mattress and doesn't spend it for 5 years.


    What happens? He reduces his consumption. He doesn't try to outbid competitors for the goods he wants with that money. Prices go down. Things become cheaper. People who are participating in trade have an easier time affording what they want. Their savings rates go up (or get less bad). This frees up money for capital investment by others.


    Furthermore the miser hoarding his money still has his wants to satisfy. As the economy settles down to the new monetary regime, his desire to maintain a high cash balance as a hedge against future uncertainty will be reduced, while his other desires stay the same or increase. At some point, he is going to spend the money. If he doesn't, and it sits in a mattress forever, then machts nicht -> everyone else's purchasing power is permanently improved by the miser's inaction.

  • Friedman was a monetarist who hoped that politicians would manage the money supply judiciously. Toward the end of his life, he admitted that his expectations in that regard were unrealistic.


    I consider the Austrian school to be the current definitive authority on economics.


    I have no idea what you mean by "invested in money" in the context given.

  • Stopping a text on the Great Depression in 1932


    ?

  • Sam Grove,


    Stopping a text on the Great Depression in 1932 is like describing a trip to the moon as though everything significant had happened by the exit from the stratosphere. You can't be serious about Rothbard.


    Prove to me I'm simplistic, and at least get as far as Milton Freidman.

  • Vic

    How come you never mention the Misean view of the Depression? GMU is the one center of economic thought which should actually devote some time to it, yet it is mysteriously absent.

  • brotio

    Sam,


    I hope you said ten Hail Franklins after your blasphemy. You've been told hundreds of times that the GD was caused by the failure of the Free Market That Has Never Existed.

  • That is simplistic.

    The stock market crash was the conclusion of a bubble fostered by credit/currency expansion by the FED. The depression was a necessary correction, but it was prolonged by 16X normal by the policies pursued by Hoover then FDR which stifled investment in production.


    Read Rothbard's exposition on the depression.

  • Lee Jamison

    I'm going to risk sounding simplistic here. The fundamental failing of the policies that prolonged the Great Depression was that leaders invested in money rather than production. Deflation meant you could make a profit with your mattress stuffed with paper money. Forget the risk of investing in industry and productivity!


    W.W.II forced the economy to make things and put people to work and it grew threefold in three years.

  • The question is the impact this will have on the overall market as the financial sector has been acting as a sort of 'lubrication' pump for industry. The focus on home ownership has mis-allocated resources and the financial lords are thwarting reallocation.

  • I have never understood the role of the massive shift in the largest economic sector in the 30's (agriculture) from a very labor intensive business to a tractor driven mass-production business, on the Depression. When farms used horses for power, the man-hours required per KWH was huge and all those stable boy jobs went away over a very short time period. The shift from horses to cars and tractors is one of those exponential growth problems, where the last doubling of the number of cars and tractors destroys the existing horse based employment in a short time.


    We will have a big drop in the finance sector employment, but that is a drop in the jobs bucket compared to agricultural employment in the 20 and 30's.

blog comments powered by Disqus

Previous post:

Next post: