Great Depression

Conventional wisdom tends to treat President Hoover as a clueless advocate of laissez faire who refused to stimulate the economy in the dramatic downturn. Franklin Roosevelt, on the other hand, was the heroic leader who both saved the day and transformed the American economy through his promotion of the New Deal. …

There is little corroboration in the historical record for this simplistic storyline. … Most of what both Presidents did in fiscal policy had little impact on the Depression one way or another. … The consensus view is that FDR’s [main] policy success was the abandonment of the gold standard in 1933.

Though there is still a lively popular debate about the “true” cause of the Great Depression, there is nonetheless a strong expert consensus … The Fed’s focus on curbing speculation in the stock market by restricting lending—as well as its unwillingness to extend liquidity and expand the money supply in the face of a collapsing economy and a wave of bank panics in the early 1930s—deeply aggravated the severity and extent of the downturn.

That is John Nye.  Read and learn.

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  • Vladimir M.

    John V. C. Nye:

    The consensus view is that FDR’s policy success was the abandonment of the gold standard in 1933.

    What was abandoned in 1933 can’t be fairly called “gold standard,” though it often is. With a real gold standard, such as the one that existed before WW1, banknotes are readily convertible to gold. The monetary system established after WW1 was in fact a “gold-exchange standard,” in which the paper money had only an indirect and tenuous link to gold:
    http://internationalecon.com/Finance/Fch80/F80-4.php

    Regardless of what one might think about the gold standard and monetary theory in general, this difference should be taken into account. I’m pointing this out specifically because sweeping general conclusions about commodity money are all too often drawn simplistically from the events at the onset of the Great Depression.

  • david

    Nye is (consciously, I venture) playing off the “conventional wisdom” himself; he correctly identifies that the conventional wisdom is wrong on the effect FDR’s fiscal policies had. But he is vague on what those fiscal policies actually were, which the conventional wisdom is also wrong on; FDR was not very expansionary.

    There is also no need to blame a collapse of ‘impersonal trust’ or a restoration of previous social order for GD-era protectionist tariffs; we know why countries did it – boosting net exports is a great way to restore aggregate demand, albeit at the expense of all your trade partners. Hence an environment of retaliatory tariffs and devaluations.

    But really, the weak point in Nye’s argument is not his elucidation of the Great Depression (which just omits facts, not assert anything outwardly ridiculous), but his attempt to link this to a “communal, even socialistic approach to the economy”. I mean, really?

  • Lord

    Yet the economy sank under Hoover and grew sharply under FDR. While Hoover did nothing monetarily other than try to balance the budget, FDR intervened whether that was the bank holiday and deposit insurance to the gold standard.

    • josh

      To be fair, it would be difficult to maintain the level of unemployment FDR inherited even if he tried.

      • Lord

        That is probably what Hoover thought after the first year. I have little doubt Hoover would have worsened the situation further had he had a longer term. He had very limited ideas about how he could intervene and most of them were wrong, yet his was the conventional view of the time. It was FDR’s lack of conventionalism that turned things around. Perhaps anyone else could have done so, it doesn’t take a genius to abandon failing policies, but it does take some courage and someone uncommitted to them.

  • Drewfus

    Between the end of 1929 and the beginning of 1933, total payroll in the United States fell by one half.

    This enourmous decline in take-home pay included a combination of large reductions in work hours, and – somewhat later – substantial cuts in wage rates (dependant on industry of course – it was worst in rural areas).

    Now if you cut total payroll by half in any economy at any time, you will indeed experience a major economic depression. It is precisely because these large scale, almost across the board wage deflations no longer occur in most modern economies that depressions are no longer a part of the economic landscape. This change in IR is mostly cultural in nature – economic policies like deficits have nothing to do with it – as these simply involve a partial redirection of private expenditure to the (less efficient) public arena.

    As for the Great Depression, neither Hoover nor RDR had any particular role in its cause, length, depth, or process of recovery. The Depression was ‘cured’ when wage rates and wage incomes stabilized, which occured approximately during the election/inauguration period, 1932-33.

    The only modern economy that still suffers protracted periods of recession and depression is the only modern economy that incurs substantial wage-deflationary episodes. That country is Japan. Notice that this is also the modern society that most reveers traditional authority and customs. It is the lack of Western individualism that is holding back Japan, not the lack government spending.

  • Proper Dave

    “Conventional wisdom tends to treat President Hoover as a clueless advocate of laissez faire who refused to stimulate the economy in the dramatic downturn.”

    This is not some CW, even that view is overly kind, Hoover was not only “do nothing” he was actively obstructionist of congress when they eventually stepped in through legislation in his term.

    Roosevelt also did to little at the end of the day, he was famously befuddled by a visit and presentation by Keynes.

    The Fed screwed up, no great revelation there.

    • Proper Dave

      Just one thing, I am not comparing Roosevelt to Hoover in any way.
      Roosevelt and his administration was actively experimenting and interventionist and obviously some of them worked others only worked a bit and some failed as well.
      We can only really say that Roosevelt should have been much more aggressive with the perfect hindsight of today.

  • josh

    “With a real gold standard, such as the one that existed before WW1, banknotes are readily convertible to gold.”

    That was a gold-reserve standard. It was really a national debt standard. There hasn’t been a “real” gold standard (one where gold is actually money and bank notes actually represent a quantity of gold) since the 1600s.

  • elmo

    I know some GMU Austrian economists who would disagree with that.

  • Vladimir M.

    josh

    That [before WW1] was a gold-reserve standard. It was really a national debt standard. There hasn’t been a “real” gold standard (one where gold is actually money and bank notes actually represent a quantity of gold) since the 1600s.

    This is true in the sense that during the classical gold standard, there was never a 100% backing of the paper currency with gold (i.e. the actual amount of gold in the vaults was always smaller than the total face value of all paper in circulation). This was true for both private and government-issued banknotes. Thus, the system would indeed collapse if there was a run on the paper currency, and governments did intervene from time to time to suspend convertibility in such situations.

    However, this was considered an extraordinary measure appropriate only for extreme circumstances — typically, it would mean declaring banking holidays during major panics or, as the most radical measure, indefinitely suspending the convertibility of government notes during major wars. During normal times, paper was readily redeemable for specie (perhaps with a small fee, but nothing punitive). This was definitely not the case for the post-WW1 gold-exchange standard, which allowed for far more extreme dilution, and thus (arguably) created the conditions for a panic of unprecedented proportions.

  • Kenneth Switala

    The presidential history parts of this article were interesting, but they appear poorly integrated into the rest of the ideas expressed inside. One issue that stood out to me was that the author’s premise and conclusion do not fit well together. He warns about losing our system of impersonal trust at the end of the article, but has already admitted in the beginning that no such system has existed in the first place. Given this, the conclusion at the end is pointing in the opposite direction of where it would logically be expected to go.

    It would seem more appropriate that instead of a warning about descending into some sort of pre-free market savagery, which is incredibly unlikely, a hope could be expressed that the system is expanded and further deregulation occurs in the future so that the free market system can be further tested and proven capable.
    His warnings against the role of regulatory solutions in generating new crises are left vague and could be just as easily given to a system that is being modified in the favor of less regulations. The criticism is also too general, modern politicians are more than capable of focusing their regulatory capabilities on promoting the same goals that a free market does, such as competition.

  • http://yahoo JW,TX

    Our Government an Big Business out controll is in too far an too deep to stop the Greedy from Wall Street,Big Oil, FDA, Governers, state employees have rapped our economy ancountry to its knees. Its a freight train once set in motion, that cannot be stopped till it crashes.