Cowen on the Great Depression and New Deal

by Don Boudreaux on November 25, 2008

in History, Monetary Policy, Myths and Fallacies, Regulation

Here’s Tyler Cowen, writing in the New York Times, helping to set the record straight about the Great Depression and the New Deal.

Be Sociable, Share!

Comments

comments

36 comments    Share Share    Print    Email

{ 18 comments }

Bel Air November 25, 2008 at 9:44 am

I really want to read Professor Cowen's column but I just can't quite get myself to click on a NY Times link anymore.

Don Mynack November 25, 2008 at 9:53 am

Why does Harding get no mention when American depressions are discussed? He essentially ignored most of Hoover's interventionist advice in 1921, choosing instead basic measures like more unemployment assistance, and that depression lasted only a year. By obsessively focusing on the ridiculously overrated FDR, we ignore many lessons that could actually help us now.

RM November 25, 2008 at 12:08 pm

Great article until he described "constructing a basic social safety net" as good. Is he talking about social security? If so, it wasn't good.

vikingvista November 25, 2008 at 1:45 pm

FDR is emotionally linked to many from the WWII generation as the leader of the good guys against German and Japanese aggression. He apparently gave inspiring fireside chats as well, for those who are susceptible to such rhetoric. Now that that generation is leaving us, we will be more able, in mainstream settings, to start objectively assessing FDR's mistakes as well as his successes.

Funny how circumstances affected one's outlook on FDR at the time. One of my grandfathers was a farmer and until his last day adored FDR. My other grandfather owned a jewelery store and never stopped despising FDR. Half a century after FDR died, neither man lost his emotional response to him.

Marcus November 25, 2008 at 4:06 pm

Concerning Cowen's claim that it was war time orders from Europe that helped.

I'm wondering how that works? What did we get in the deal? Worthless pieces of paper?

European money (or some other form of IOU like war bonds) are only valuable if we can exchange them for European products and services.

Yet, they were too busy fighting a war.

Again, it looks like it's just 'paper prosperity'. Meaning, the numbers look good on paper but the same problem persists. Much of our production capacity was consumed producing goods no one actually wanted in any sense of what any reasonable person would mean by the word 'wealth'.

Marcus November 25, 2008 at 4:27 pm

One other comment.

Concerning the Fed's letting banks fail in the 30's.

As others have pointed out, the early 30's banks faced what I understand to be a legitimate 'liquidity crisis'. Providing banks they needed to survive the runs may have actually prevented the entire depression.

Today, it's not clear to me that we actually have a liquidity problem. It appears it is a solvency problem. In which case letting banks fail may actually be the right thing to do.

Anonymous November 25, 2008 at 4:29 pm

"Providing banks they needed to survive the runs may have actually prevented the entire depression."

That should have read:

Providing banks WITH WHAT they needed to survive the runs may have actually prevented the entire depression.

Methinks November 25, 2008 at 6:49 pm

Marcus,

Today, it's not clear to me that we actually have a liquidity problem. It appears it is a solvency problem. In which case letting banks fail may actually be the right thing to do.

Anna Schwartz agrees with you. She believes Bernanke is fighting the last war.

here is a link to recent Wall Street Journal interview with her on this very topic. She's old enough to remember the Great Depression :)

http://online.wsj.com/article/SB122428279231046053.html

Crusader November 25, 2008 at 7:36 pm

WW2 only ended the Great Depression in the facet of unemployment, however it produced no wealth, only helped to decrease Japan and Germany's. It was only after the war did America start to increase its own wealth.

John Smith November 25, 2008 at 7:49 pm

Why is economics, even more so than psychology, basic scientific understanding contested by those earning a living within the field?

All academic disciplines have their disagreements,,, but the basics which one builds upon to learn the subject is the same.

In economics the “professionals”, “noble prize winners”, “employed to teach the subject” do not even agree on the basics. I find that a very strange science.

Ray G November 25, 2008 at 8:06 pm

It's as if the powers that be are trying to convince everyone that we are facing something close to what we faced in the Great Depression.

It seems that we have a true bipartisan effort to create an atmosphere for the masses to be saved by an all-caring, all-knowing government.

Politicians of all stripes are able to bring home the bacon, expand their personal spheres of political influence, and Obama gets to be the next FDR.

No matter how badly it fails, it will all be painted a great success with the more obvious signs of failure being portrayed as mere hiccups caused by the selfish and greedy.

We're slipping into an Ayn Rand novel minus the good guys.

Sam Grove November 25, 2008 at 10:02 pm

So,

the single biggest cause of the Great Depression was that the Federal Reserve let the money supply fall by one-third, causing deflation.

And

..expansionary monetary policy was the key to the partial recovery of the 1930s. The worst years of the New Deal were 1937 and 1938, right after the Fed increased reserve requirements for banks, thereby curbing lending and moving the economy back to dangerous deflationary pressures.

So the FED brought on the depression by shrinking the money supply (after a previous expansion?), which was relieved by re-expanding the money supply except that the FED tightened the reserve requirements leading to the failure of many banks which had extended under the looser requirements.

And it all gets blamed on "Capitalism".

Methinks November 25, 2008 at 11:10 pm

The worst years of the New Deal were 1937 and 1938, right after the Fed increased reserve requirements for banks,

Also after the highest marginal tax rate was increased to 79%.

Martin Brock November 26, 2008 at 3:27 am

It's as if the powers that be are trying to convince everyone that we are facing something close to what we faced in the Great Depression.

I get the same eery feeling, Ray. I've yet to see any persuasive evidence, besides the LIBOR-OIS spread, that there was ever a credit crunch at all. As I understand this spread, it only implies that banks aren't willing to lend to other banks except to make very short-term demand deposits, presumably because they perceive an unusually high risk of bankruptcy in the intermediate term.

Bernanke, Paulson and the rest then create this hysteria in which Congress simply hands Paulson a trillion bucks to spend, while Bernanke hands out similar reams of taxpayer obligation to a handful of special interests in the state sponsored, Big Banking community. And the FDIC offers more taxpayer bailouts for larger deposits.

Once again, a wealthy elite simply commands taxpayers to guarantee their riches. Anyone still believing that statutory redistribution is about "equality" or "the poor" or some imaginary "working class" is obviously out of touch with reality.

Oil Shock November 26, 2008 at 1:25 pm

I just got off the phone with Citibank. I was activating my new credit card. They just offered me $25,000 cash advance at 0% for 15 months on my credit card.

Martin Brock November 26, 2008 at 3:45 pm

Can you hear the helicopters overhead?

Martin Brock November 26, 2008 at 3:49 pm

If you're a gambling man, take the $25g and buy Citigroup. It's up 20% today.

Mesa Econoguy November 26, 2008 at 8:34 pm

You could have doubled your money from C low (3.05) a couple days ago.

Ideally, you would have used your new C credit card to margin size C position to the hilt, then cashed out your winnings at the close today to pay off your (personalized) Capital One card.

Previous post:

Next post: