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Bursting the Myths of the Great Depression
Government of all kind depends on elaborate mythologies to keep the people complacent in the face of constant attacks on their liberty, their property, and even their lives. Kings used to proclaim that they were divine or at least that they ruled with divine approval, so disobedience to them was actually disobedience to God or the gods. That worked to keep most of the citizenry in line for a very long time.

As religion started losing its hold over people, rulers came up with new ideas. One was that the state was like a big, sheltering family where everyone had to cooperate for the common good — as directed by the government. Another idea was that the alternative to control by the government, anarchy, was so terrifying that it must be opposed at every turn. Government, according to this notion, is our bulwark against many calamities, including economic implosion. If it weren’t for the benevolent, far-seeing actions of politicians and their hired regulators, we would have to endure repeated and prolonged depressions. So even if you aren’t crazy about everything the government does, you need to accept it because the alternative is so much worse.

The argument that we need the government to stabilize and stimulate the economy came to the forefront during the 1930s and it’s there once again following the bursting of the housing bubble and the stock-market collapse in 2007-08. People who never think the state has too much power are beating the drums and hollering that these events once again prove the need for government to have a tight — tighter — grip on the economic reins. Numerous articles and books have been written on the wisdom we can gain by looking back in history at the Great Depression and President Roosevelt’s New Deal. The message they convey is that laissez-faire capitalism causes depressions and we must rely on activist government for salvation.

Economist Robert Murphy (Ph.D. from New York University, formerly on the faculty of Hillsdale College and now an independent scholar) agrees that we can learn a lot by looking back at the Great Depression and New Deal, but maintains that the lessons to be learned are the exact opposite of those that our political establishment (including its many intellectual hangers-on) want us to learn. Far from proving any defect in capitalism, the Depression actually shows that politicians should refrain from political meddling with the economy, especially federal tampering with money and credit. Also, if we hunt for the truth about the New Deal, we discover that it was just a parade of endless folly and bungling that made things worse. ...

... Americans have also been told that the Depression wouldn’t have been so bad if it hadn’t been for Herbert Hoover’s dogged insistence on letting the free market correct itself. But that idea, Murphy demonstrates, is also utterly false. Hoover was thoroughly committed to “progressive” policies he felt would put the economy back on its feet. Especially revealing is Murphy’s recounting of the fact that back in the Harding administration (1921-23) Hoover had argued in favor of government “stimulus” and interventionism. Fortunately, President Harding listened instead to Treasury Secretary Andrew Mellon, who argued for federal budget and tax cuts to help speed recovery, but otherwise not to tinker with the economy. Under Mellon’s approach, the economy quickly rebounded from its sharp postwar slump. Hoover, however, remained devoted to his belief that recessions call for more government intervention, not less.

Once the stock market crashed in 1929 and unemployment rose, Hoover (who had been elected president in 1928) rejected the counsel of Mellon and others who urged him to follow the same course Harding had. He was certain that it would be more effective and humane for the federal government to step in and override the slow and “cruel” free-market adjustment process. By embracing an activist approach, Hoover managed to convert what would have been a short recession into America’s worst depression.

Hoover was voted out of office in disgrace in the 1932 election, but to his dying day he remained adamant that his activist, “progressive” economic policy was right. ...