Friday, March 27, 2009

Great Myths of the Great Depression III

A comment from Anonymous reads:
Once again, thank goodness for the two-party, system, as much as it is a pain. Thank goodness. Because if Libertarians ever got a hold of this country, wow, talk about going down the tubes. These ideas are so radical and unproven, its crazy.
Being as how both the Republicans, and now the Democrats have taken our country so far down those tubes, I'm not sure how much further we could go before complete ruin. But aside from that, exactly which parts of his essay are radical and unproven? I'm assuming, of course, that you read the essay. At least I sure hope you did before making such a comment.

The arguments that Mr. Reed presents are not new, and certainly are not unproven. They carry a lot of weight among most economists and a lot of historians. Though I've only read parts, one of the best books you could read on the subject is Murray Rothbard's America's Great Depression. Here's the conclusion of the 5th edition's introduction by well-known historian Paul Johnson:
[The Great Depression] is a dismal story, and I do not feel that any historian has satisfactorily explained it. Why so deep? Why so long? We do not really know, to this day. But the writer who, in my judgment, has come closest to providing a satisfactory analysis is Murray N. Rothbard in America's Great Depression. For half a century, the conventional, orthodox explanation, provided by John Maynard Keynes and his followers, was that capitalism was incapable of saving itself, and that government did too little to rescue an intellectually bankrupt market system from the consequences of its own folly. This analysis seemed less and less convincing as the years went by, especially as Keynesianism itself became discredited.

In the meantime, Rothbard had produced, in 1963, his own explanation, which turned the conventional one on its head. The severity of the Wall Street crash, he argued, was not due to the unrestrained license of a freebooting capitalist system, but to government insistence on keeping a boom going artificially by pumping in inflationary credit. The slide in stocks continued, and the real economy went into freefall, not because government interfered too little, but because it interfered too much. Rothbard was the first to make the point, in this context, that the spirit of the times in the 1920s, and still more so in the 1930s, was for government to plan, to meddle, to order, and to exhort. It was a hangover from the First World War, and President Hoover, who had risen to worldwide prominence in the war by managing relief schemes, and had then held high economic office throughout the twenties before moving into the White House itself in 1929, was a born planner, meddler, orderer, and exhorter.

Hoover's was the only department of the U.S. federal government which had expanded steadily in numbers and power during the 1920s, and he had constantly urged Presidents Harding and Coolidge to take a more active role in managing the economy. Coolidge, a genuine minimalist in government, had complained: "For six years that man has given me unsolicited advice—all of it bad." When Hoover finally took over the White House, he followed his own advice, and made it an engine of interference, first pumping more credit into an already overheated economy and, then, when the bubble burst, doing everything in his power to organize government rescue operations.

We now see, thanks to Rothbard's insights, that the Hoover–Roosevelt period was really a continuum, that most of the "innovations" of the New Deal were in fact expansions or intensifications of Hoover solutions, or pseudo-solutions, and that Franklin Delano Roosevelt's administration differed from Herbert Hoover's in only two important respects—it was infinitely more successful in managing its public relations, and it spent rather more taxpayers' money. And, in Rothbard's argument, the net effect of the Hoover–Roosevelt continuum of policy was to make the slump more severe and to prolong it virtually to the end of the 1930s. The Great Depression was a failure not of capitalism but of the hyperactive state.

I will not spoil the reader's pleasure by entering more deeply into Rothbard's arguments. His book is an intellectual tour de force, in that it consists, from start to finish, of a sustained thesis, presented with relentless logic, abundant illustration, and great eloquence. I know of few books which bring the world of economic history so vividly to life, and which contain so many cogent lessons, still valid in our own day. It is also a rich mine of interesting and arcane knowledge, and I urge readers to explore its footnotes, which contain many delicious quotations from the great and the foolish of those days, three-quarters of a century ago. It is not surprising that the book is going into yet another edition. It has stood the test of time with success, even with panache, and I feel honored to be invited to introduce it to a new generation of readers.

Paul Johnson
1999

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