1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/9058/the-new-deal-and-the-great-duration/

The New Deal and the Great Duration

December 5, 2008 by

Writes Bob Higgs:

The New Deal has been a hot topic recently. Aside from the looming likelihood of a new New Deal à la President Obama and company, the present recession, which many fear may turn into a serious depression, has given new currency to assessments of the original New Deal. It says something about the state of economics that economists continue to debate this topic almost as hotly now as they did seventy years ago.

Over the years, I have ventured to make small contributions to this debate, most notably in a 1997 article titled “Regime Uncertainty: Why the Great Depression Lasted So Long, and Why Prosperity Resumed after the War,” a modestly improved version of which now appears as the first chapter of my 2006 book Depression, War, and Cold War: Essays in Political Economy. (The first five chapters of this book, considered as a coherent whole, show why my hypothesis has the additional charm – lacking in virtually every other hypothesis about the economy’s course between 1933 and 1940 – of also explaining the operation of the wartime economy and the smooth postwar transition to genuine market-oriented prosperity.)

Defenders of the current orthodoxy, however, tend to pooh-pooh explanations such as mine. My story pertains to why the post-1933 recovery was such a drawn-out affair – I call this aspect of the Great Depression the Great Duration. In response to my claims and my evidence in support of them, the mainstreamers might (and at certain Web sites actually seem to, as it were) engage me in a dialogue as follows:

Higgs: blah blah blah, Great Duration, blah blah blah, New Deal, blah blah blah, regime uncertainty, blah blah blah, insufficient net private investment, especially long-term investment, to sustain a prompt, lasting recovery.

Mainstreamer: Nonsense. The recovery after the beginning of the New Deal in 1933 was rapid. Look at the data, you old fool. Real GDP rose by about 43 percent between 1933 and 1937. Splendid recovery. No problema. All it took was going off gold.

Higgs: Then why had the economy still not recovered fully as late as 1940, when the unemployment rate was almost 15 percent and the transition to the war-command economy was beginning to make standard interpretation of variables such as gross domestic product, the price level, and the rate of unemployment increasingly problematic?

Mainstreamer: The recovery would have been complete much earlier, thanks to various New Deal measures, especially its abandonment of the gold standard, but the Fed foolishly doubled the required reserve ratios for commercial banks during 1936-37, thereby triggering the sharp depression of 1937-38, which set the recovery back for three years.

Higgs: Even if we grant, which I will only for purposes of debate, that these Fed-mandated increases in required reserves constituted the sole important cause of the depression of 1937-38, you are treating these actions as exogenous to the New Deal. That view of the matter makes little sense because the Fed’s statutory authority to change required reserve ratios as it did came from the Banking Act of 1935, a major New Deal enactment.

Moreover, Marriner Eccles, the chairman of the Board of Governors at the time of these actions, was appointed by President Franklin D. Roosevelt in 1934 and was highly sympathetic to New Deal-type policies. All of the other board members were also Roosevelt appointees, because the board had been reorganized after passage of the 1935 act, at which time Roosevelt named new members, except for Eccles and M. S. Szymczak, earlier Roosevelt appointees to the Federal Reserve Board whom he carried over to the new board.

The Fed did not act independently, but developed its plan of action in close cooperation with the Treasury as part of a broader government program to restrain the buildup of excess reserves in the commercial banks. The Treasury, for its part, announced that after December 22, 1936, it would sterilize all future monetary gold inflows from abroad, and by August 1937, it had sterilized more than $1.3 billion of such inflows, which otherwise would have caused bank reserves to increase.

So, if you want to blame the Fed’s ill-advised actions of August 1936 to May 1937 for the Great Duration, go ahead (although I insist that various other things also helped to bring on the 1937-38 depression, and even more things contributed to the Great Duration in its entirety), but don’t assume that these actions had nothing to do with the New Deal. They were, from the statutory and personnel ground up, simply another aspect of the New Deal. If you claim that these Fed actions caused the Great Duration, you are ipso facto claiming that the New Deal caused it.


Horst December 5, 2008 at 4:10 pm

From the article: “Mainstreamer: Nonsense. The recovery after the beginning of the New Deal in 1933 was rapid. Look at the data, you old fool. Real GDP rose by about 43 percent between 1933 and 1937.”

Is that claim by New Deal defenders accurate? Even if they can find numbers to substantiate that claim, I’m sure they counted things like spending on government programs as part of GDP or other funny business.

To claim that we had China-like economic growth during the Depression seems dubious to say the very least.

ajax December 5, 2008 at 4:36 pm

If I recall, Gov’t spending is part of the GDP equation. And during the Great Depression, Gov’t spent the hell out of everybody.

David Bratton December 5, 2008 at 5:30 pm

The government was also engaging in a lot of price fixing at the time so I don’t know how useful those GDP numbers would be even if they hadn’t counted government spending.

Caveman December 5, 2008 at 6:44 pm

If I recall, Gov’t spending is part of the GDP equation. And during the Great Depression, Gov’t spent the hell out of everybody.

I would guess mainstreamers would argue that’s exactly why we need increased government spending/intervention now. For Keynesians, the solution is always more state intervention.

spencer December 5, 2008 at 7:17 pm

You are completely right that the Feds action in 1937 were a consequence of the New Deal. If you read the Fed minutes it is obvious that the Fed was so convinced that the strong growth in 1935-36 would cause inflation that they had no choice but to tighten.

See, if there had been no New Deal the Fed would not have had to tighten because they would not have been worried that strong growth was generating inflation.

Stanley Pinchak December 5, 2008 at 10:12 pm

I think that Higgs is still onto something here in our current recession. Everyone wants to know what is going on with the bailout money. This uncertainty theorem seems to justify the current reluctance to lend and borrow, despite the great incentives that the Fed and Treasury have been using. Apparently too much stick has been indiscriminately applied recently for the typical countercyclical policies to work their “magic” once again and blow us up a new business cycle.

newson December 6, 2008 at 12:16 am

for those who are interested in the fed’s 1936/7 sterilization of the massive gold inflows, salerno has a good article:


actually, it’s a good overall primer for those who don’t have the time for the longer “america’s great depression”.

fundamentalist December 6, 2008 at 8:30 am

This just amplifies the principle of Austrian econ that says you can’t derive theory from data. It seems that every author has a different view of what happened during the depression, what caused it and what the results of policy were, all because everyone emphasizes different facts and interprets them differently. The only way to interpret history is to approach it with sound theory first, that is, Austrian theory.

C (The Forgotten Man) December 6, 2008 at 8:50 am

Here comes the NuNuDeal!

Josh December 6, 2008 at 1:42 pm

Eh. Austrians hate the New Deal because Roosevelt did something. Most Americans loved the New Deal because Roosevelt did something. Most Keynesians believe he didn’t do enough, and all Austrians think he did too much.

Considering that the depression was global and certain nations emerged sooner than others, what nation followed Austrian principles closely and how did the depression turn out for them? If nobody followed them successfully then at least I feel safe assuming that nobody will follow them this time and I can stop reading mises for a few years.

ew December 6, 2008 at 4:25 pm

I can’t see why the liberal illuminati can’t look at history and figure that spending like this is a bad idea in the midst of a recession

Donnie December 6, 2008 at 4:45 pm

Mr. Higgs,

Your post demonstrates that the Fed actions must be viewed as part of the New Deal. But the only conclusion we can draw is that the New Deal was a bad thing. Unfortunately, it doesn’t prove that Keynesianism is also a bad thing. In fact, it vindicates Krugmanites that say Roosevelt wasn’t really keynasian (or not enough).

I wish I could be more convinced that New Deal policies were that bad, and that they slowed the recovery.

Andy December 28, 2008 at 4:39 pm

My view on the current recession is that it will not be as bad as the Great depression and that we are more than half way through it. Just a few months ago people were talking about high oil prices, inflation and over valued stock markets. Suddenly, relatively speaking, all these issues have been turned on their head with oil prices crashing, deflation rather than inflation a concern now and stock markets that have fallen off a cliff. The interconnectedness of the global economy magnified the severity and speed of the economic downturn, but the same forces will also work in reverse to bring back economic growth just as fast. See more details : http://www.savingtoinvest.com/2008/12/how-long-will-current-recession-last.html

david February 26, 2009 at 12:06 pm

pretty typical of the libertarian deniars.

Comments on this entry are closed.

Previous post:

Next post: