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The Foundational Economic Myth of Our Era: "Government Cured the Great Depression"

Gary North
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May 6, 2011

Economist Thomas Sowell recently challenged the Great Myth of FDR and the Great Depression.

No economic downturn in all those years ever lasted as long as the Great Depression of the 1930s, when both the Federal Reserve and the administrations of Hoover and of FDR intervened.

The myth that has come down to us says that the government had to intervene when there was mass unemployment in the 1930s. But the hard data show that there was no mass unemployment until after the federal government intervened. Yet, once having intervened, it was politically impossible to stop and let the economy recover on its own. That was the fundamental problem then -- and now.

http://www.lewrockwell.com/sowell/sowell44.1.html

This myth was challenged by Murray Rothbard in America's Great Depression (1963). I read it a few months after it was published. I was one of the few people who did. The book was savagely attacked when it was reviewed at all. It undermined the Democrats' myth of FDR as savior and the Republicans' myth of Hoover as a victim of uncontrollable circumstances. FDR extended the worst of Hoover's policies, and the depression dragged on for another seven years.

Rothbard's book was ignored by academia. Two decades later, Paul Johnson used it in his great book, Modern Times (1983), to explain why the Great Depression accelerated under Hoover's policies of legalized price floors and tariffs (Smooth-Hawley).

Hoover was doing what governments around the world were doing. Government policies turned the recession into the Great Depression.

Rothbard was able to draw on books published during the Great Depression. One was by Lionel Robbins, a disciple of Ludwig von Mises: The Great Depression (1934). It was published by Macmillan in Great Britain. He explained why government policies was prolonging the recovery. Another book was Banking and the Business Cycle (1937), which laid the blame on the Federal Reserve's policies in the 1920s. It was also published by Macmillan. Both are available as free downloads or for purchase.

But in 1936, Macmillan published Keynes's General Theory. That book win the ideological battle.

Yet the real problem stretched backward to World War I and the abandonment of the gold coin standard in Europe. This was explained after the War by economist Benjamin Anderson,. He carried the story through World War II. His articles were published through the era of the Great Depression by the Chase Bank. His book, Economics and the Public Welfare was published in 1949, the year of his death. It was universally ignored. The Keynesian takeover of academia was almost complete in 1949.

This story went down the memory hole at the time. It was never given serious consideration by the financial press. The arguments were out of synch with the desires of politicians to use deficit spending, taxation, and currency depreciation to stimulate a recover. All these measures failed until World War II allowed them to implement full-scale controls.

The official explanation has finally has boiled down to this: World War II ended the depression. This debate is reflected in Keynes vs Hayek: Round 2. The scene of Hayek holding a machine gun, with World War II images behind him, gets to the point. War is destructive. The scene (3:00) is only 60 seconds long. It deserves a book.

I wrote an article on this in 2010. http://www.garynorth.com/public/6322.cfm

Until the myth of FDR as an economic savior is removed from the textbooks, we will not be close to winning the ideological war against Keynesianism. I have discussed this here This is why we need several competing American history home school and private day school curricula, all with the this message: the growth of Federal power has not often led to freedom and economic growth. It has retarded both.

We are a long way from this educational scenario.

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