Depression Myths

There are a lot of myths about the Great Depression. Most people who know anything about economic history know that FDR's New Deal was a colossal failure (too bad these people are not part of the Obama administration).

In the simplest terms, if the New Deal was at all successful, then why did unemployment stay about 14% for FDR's entire term prior to WWII? That's 8 years! EIGHT YEARS! You would generally think if the New Deal was at all successful we'd see some economic growth prior to WWII, but we didn't. It wasn't until after global warfare had subsided that we started to grow again, and it was largely because the New Deal was dismantled after the war.

Anyway, it's not hard to see how the New Deal was a failure. What is harder to see is when the government did something good. Generally, when government does something right, especially something to avert a disaster, no one notices. For example, if the government prevented nuclear war from occuring and nothing happened, no one would notice because nothing happened.

A big 'nothing happened' during the Harding administration in the early 20's. The Panic of 1920 had the potential to launch the US into a depression a decade earlier.

Check out this very good article about Harding and the Panic of 1920. GDP plunged 24% in a year, and the unemployment rate more than doubled. But we got out of it because the government drastically slashed taxes and let the private sector rebound.

It amazes me how historians paint the picture of the 20's as some sort of disaster waiting to happen. It was a period of immense economic growth. Most periods of growth eventually result in overleveraging and a recession. The question though is how society deals with it. By adopting big government, anti-business approach, a correction can quickly turn into a Depression.