The Great Depression II

One basis for deciding whether we are in a "recession" or a "depression" is distinguishing how recessions become depressions. With the hindsight of history, we already know.

Parallels between America's current economic crisis and the 1930's Great Depression are instructive. Then, as now, hardship was preceded by a major banking upheaval. Then, as now, a regulatory blizzard followed. Then, as now, millions were displaced. And then, as now, the cause of the Great Depression was widely misunderstood. Many believe today that the 1929 stock market crash caused the Great Depression all by itself, that it was so severe it mysteriously destroyed wealth for another 13 years. To put that in perspective, the serious Carter-era recession should have, by this logic, precluded the Reagan recovery in 1982 and perhaps wreaked havoc until 1990. Not only is this argument absurd, it manifestly did not happen.

In Franklin Delano Roosevelt's 1933 inaugural address he lectured that "[t]he only thing we have to fear is fear itself," suggesting Americans suffered irrational neuroses. This is not at all true. Americans made entirely rational and prudent business decisions amidst considerable uncertainty. Though FDR is invariably cast as heroically facing down near-insurmountable economic travails, the less-flattering diagnosis is much more obviously true: he caused them.

With the New Deal, the Second New Deal, TVA (rural electrification), FERA (emergency relief), CCC (youth work program), AAA (farming subsidies), NIRA (industrial regulation and public works), PWA (public works), WPA (public employment), FDIC (banking regulation), and Social Security all exercising unprecedented Federal power, investor uncertainty was justified and profound. Roosevelt's willy-nilly spending legitimized concern that personal fortunes would be entirely consumed. Capricious policies (often framed by class warfare) caused real fear, not "fear of fear itself," fanning a bad recession into the Great Depression. Without doubt, the Crash of 1929 was extremely serious -- almost as serious as the great unraveling that started in September 2008. The Great Depression from 1932 to 1942, however, was Roosevelt's fault. (more)