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Challenging a Depressing Myth

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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