Understanding the Depression
As the economy continues to slide toward a downturn, it is crucial to understand what is going on. Inevitably, we will hear about how the government should pull out all the stops to turn the tide, and this prescription is rooted in certain premise, whether explicit or implicit, about the nature of the problem and the proper role of government in economic life. The reason most people tend to believe government should “do something” about a business cycle probably goes back to the Great Depression, the New Deal, and World War II. Before that, American depressions were brief and the ideological disposition of most the American populace was to favor letting the market handle it. The idea that government should or could fix a depression was quite alien.
Seeing as how common conceptions about depression and the role of government rely on historical understanding, it is important to look at economic history with some perspective and a coherent economic theory in mind, one that is consistent with the data and does not lead to absurd conclusions.
For an explanation of the causes of the stock market crash of 1929 as well as a tight history of the policies undertaken by the Herbert Hoover administration—a topic generally neglected in mainstream academic life, or treated with the unsubstantiated assumption that Hoover “did nothing” and allowed a “laissez faire” policy to dominate while the economy slumped—there is the indispensable book by Murray Rothbard, America’s Great Depression. For some explanations of how the New Deal not only failed to end the Depression (an inconvenient fact most historians acknowledge, seeing as how the Depression didn’t end during the New Deal!) there is the relatively new and incredibly important Depression, War and Cold War, by our very own Robert Higgs. This latter work of scholarship also goes into another myth that has trouble dying: the idea that World War II brought America out of the prosperity with its massive wartime prosperity (here is my review of the Higgs book).
For a somewhat journalistic treatment, with plenty of good history, on the New Deal itself, I recommend John Flynn’s classic, The Roosevelt Myth, which helps to shatter many myths about FDR’s policies of the 1930s. As for the dominant American ideological climate shifting over time, from one that opposed or didn’t even consider government fixes to cure depression to one that we have had for the last 70 years, a belief that government should do all it can to reserve economic depressions, see Higgs’s famous Crisis and Leviathan.
These are just a few important works, and there are plenty more, including many I have never read. I encourage my fellow bloggers with more insight into this area of economic history to add their suggestions.