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Did Capitalism Cause the Great Depression?

The many comments, on this post, regarding capitalism’s role in causing the Great Depression prompt me to reprise this June 2006 post on the work of the economic historian Robert Higgs.

June 14, 2006

Challenging a Depressing Myth

Don Boudreaux

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

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.