How To Cure A (Our) Depression

Imagine my shock this morning when my daily literary excerpt from was from Murray Rothbard’s America’s Great Depression. It is perhaps the best book written on the Great Depression (see my reading list) and explains why it, and all depressions, roughly behave the same way in response to external government forces. Which is to prolong a recovery. You will note the similarities to our present depression*.

* * * * *

In today’s excerpt – in a recession, it is the widespread assumption of politicians, citizens and economists that government intervention is required to return the economy to prosperity. There is an different line of thought, however, that states that recessions are an inevitable result of excesses (e.g., the overbuilding and related overlending that brought about our current crisis), and that government intervention simply prolongs the period required to “write-down” or otherwise absorb these excesses.

One such alternative theory is the Austrian school of economic thought, espoused by such authors as Ludwig von Mises and his economic disciple Murray Rothbard. Rothbard notes that the Great Depression began early in the term of President Herbert Hoover, and that Hoover spent 3.5 years aggressively intervening in the economy in a way never previously done, and as a direct result greatly exacerbated and prolonged the Depression – before handing the worsened crisis over to Franklin Roosevelt in 1933. Roosevelt’s famous New Deal programs were largely just an elaboration of Hoover’s. For example, Rothbard notes that in U.S. depressions prior to 1929, employers simply reduced wages instead of instituting massive layoffs, and unemployment remained relatively low as a result. Wages were raised with the recovery. He argues that only with the widespread introduction of minimum wages were employers forced to lay off employees in large numbers, which led to unprecedented unemployment rate of 25% during the depths of the Great Depression:

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire-to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch. Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses. Moreover, a drastic cut in the government budget – both in taxes and expenditures – will of itself speed adjustment by changing social choice toward more saving and investment relative to consumption. For government spending, whatever the label attached to it, is solely consumption; any cut in the budget therefore raises the investment-consumption ratio in the economy and allows more rapid validation of originally wasteful and loss-yielding projects. Hence, the proper injunction to government in a depression is cut the budget and leave the economy strictly alone. Currently fashionable economic thought considers such a dictum hopelessly outdated; instead, it has more substantial backing now in economic law than it did during the nineteenth century.

Laissez-faire was, roughly, the traditional policy in American depressions before 1929. The laissez-faire precedent was set in America’s first great depression, 1819, when the federal government’s only act was to ease terms of payment for its own land debtors. President Van Buren also set a staunch laissez-faire course, in the Panic of 1837. Subsequent federal governments followed a similar path, the chief sinners being state governments which periodically permitted insolvent banks to continue in operation without paying their obligations. In the 1920-1921 depression, government intervened to a greater extent, but wage rates were permitted to fall, and government expenditures and taxes were reduced. And this depression was over in one year  -in what Dr. Benjamin M. Anderson has called ‘our last natural recovery to full employment.’

 ”Laissez-faire, then, was the policy dictated both by sound theory and by historical precedent. But in 1929, the sound course was rudely brushed aside. Led by President Hoover, the government embarked on what Anderson has accurately called the ‘Hoover New Deal.’ For if we define ‘New Deal’ as an antidepression program marked by extensive governmental economic planning and intervention – including bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending (e.g., subsidies to unemployment and public works) – Herbert Clark Hoover must be considered the founder of the New Deal in America. Hoover, from the very start of the depression, set his course unerringly toward the violation of all the laissez-faire canons. As a consequence, he left office with the economy at the depths of an unprecedented depression, with no recovery in sight after three and a half years, and with unemployment at the terrible and unprecedented rate of 25 percent of the labor force.

 Hoover’s role as founder of a revolutionary program of government planning to combat depression has been unjustly neglected by historians. Franklin D. Roosevelt, in large part, merely elaborated the policies laid down by his predecessor. To scoff at Hoover’s tragic failure to cure the depression as a typical example of laissez-faire is drastically to misread the historical record. The Hoover rout must be set down as a failure of government planning and not of the free market.

*Rothbard notes that the term “depression” was used for all economic downturns prior to 1937. In that year when the economy turned south, again, FDR didn’t want to use the “D” word, so they used “recession” to describe it instead.


31 comments to How To Cure A (Our) Depression

  • There were 17 minimum wage laws passed prior to The Fair Labor Act of 1938. The Supreme Court ruled 4 times the minimum wage ewas illegal. In 1937 in West Coast Hotel, the Upreme Court reversed itself and ruled 5 to 4 that MW was constitutional. I beleive that FDR was counter productive for jobs, but evertime a state passed a ME before 1937, plaintiffs would go to court to get a restraining order against enforcement. From 1938 on the U.S. began gearing up for WWII

  • Kguy

    So that’s your solution? For the government to do nothing? History has proven that the unrestrained free market does NOT work. FDR CURED the economy, he did not exacerbate the recession. Enough of this BS, all non-interventionism leads to is excessive corporate power, which leads to inequality, which leads to the destruction of the middle class. What we need now is progressive, sensible economics, not inaction.

    • Matt Harding

      When exactly has history shown this? Just curious. You make a sweeping case for something without providing any evidence. How exactly did FDR cure the economy? This is a high school theory.

      Turning a recession into a Great Depression doesn’t constitute a success.

        • Matt Harding

          I’m sorry, you’re saying 10 years is a success? What about the aforementioned crash of 1920-1921, 18 month recession that was shaped up to be the worst in history. Leaving the failures to fail, created a healthier outcome and a shorter recession.

          I have no doubt people (not government) will find a way out of a recession (despite intervention), but your graphic only shows a small portion of the damage done in FDR’s time. Read or listen to Steve Horwitz. FDR *caused* the great depression.

          • Kguy

            10 years is a long time, but what can you do when LACK OF REGULATION leads to a stock market crash. Do you really think it would’ve taken less time to just wait and do nothing? Can’t you see that lack of regulation caused the crisis we’re in right now? Won’t you people ever learn from your mistakes? History repeats itself.

          • Matt Harding

            You obviously missed my point.

            We people have learned from our mistakes (empowering government): too much government has caused too many problems, and ONLY a government can cause problems that are this big that lasts this long.

            You’re using weak data to support weak claims. We’ve gone through this argument a hundred times or more here. See comments below and go read some Horwitz/Rothbard/Hayek/DailyCapitalist.

        • Bryan

          I Was not a believer in the FDR New Deal as solution theory until you showed me that graph. It seems pretty clear to me now. Based on this revelation, I now have a whole new group of evil doers I must rally against. Including, but not limited to Facebook, newspapers, and mountains.

          • Bryan, you have hit right on the mark with this kind of thinking. Thanks for this. In logic, this is called, post hoc, ergo propter hoc, which means because A happened before B, then A must have caused B. Poor Baby Avas, they bear a horrible burden in life.

    • Keith Weiner

      And readers keep accusing me of blind dogmatism.

      To say the free market does not work is to say that *freedom* does not work. To say that men are incompetent to run their own affairs–but competent to run the affairs of others, by force of a gun.

      And of course when a bureaucrat spends other people’s money, he:
      1) is more careful with it
      2) is more honest
      3) is smarter

      There ain’t no such thing as a free lunch!

      • Kguy

        You economic conservatives really love associating the free market with freedom, don’t you? The truth of the matter is, the free market isn’t always the best solution. And you are blindly dogmatic if you can’t accept the simple reality that some things, such as healthcare, public transportation, and education, are better managed by the government.

    • dd

      sure thing, “guy,” you keep rolling with that, gov’t boy. back to the trough for you, we’ll see how the common teet works. not going to be my problem, i assure you.

      DailyCapitalist has been infiltrated … kind of like our once free society.

  • Vitor

    No, History proves that FDR did not cure the economy. Let’s see, his big projects started in 1933, and in 1938, 5 years later, the economy was still in a depression, actually the depression ended after FDR death (so how the hell he managed to do something after dead?) and the end of WW2, when the state finally stopped inflating.

    • Matt Harding

      Agree. Not only that (and I know this is a slightly fragile argument), but the rest of the world post WW2 was bombed to hell. America was the only untouched (not counting hawaii) industrialized nation. Who else could produce and sell goods?

  • Matt Harding

    Also, I had no idea “recession” was an invention of FDR. I will no longer include that in my vocabulary. From here on out “depression” is my weapon of choice.

  • Mike

    The depression of 1929 is the same as 2008. Too much debt and declining demographics. There is nothing the govt can do about this. We must deleverage and we will have to wait until the next generation to come and provide growth in numbers. 85 million baby boomers leaving as the consumer of corporate america can not be matched by the 65 million following it.

  • Ron

    The second depression did occur as a result of excesses, just like the first one. Failure to regulate CDS under Clinton, the appointment of Christopher Cox to the SEC under Bush (Mr Cox believed that markets should be “self-regulating”!), the repeal of Glass-Steagal under Bush, and a thoroughly corrupt and over-leveraged financial industry finally brought the system to its knees.
    WWII, not the WPA, was probably responsible for the recovery, but if you think those who received checks from government-sponsored programs were not overjoyed to be able to feed their families, you are mistaken. These programs were often the only thing separating these people fom starvation. Indeed, there were some who did starve.

    • Californio

      Correction – Glass-Steagal was signed into Law by President William Jefferson Clinton, his Treasury Secretary Robert Ruben then went to work for Citibank.

  • Robbie

    Fasting is a natural process that man in long gone times used to accept. Even today some people in natural environments have to go through this process of cleansing. With economies it is exactly the same. All has to be purged thoroughly, cleaned and maintained. It is a necessary “suffering”. Perhaps not even suffering but returning to a healthy reality of no over consumption, at least in the West. Lowering wages is a good choice that as mentioned will allow for the majority of the work force to remain at their positions of work whilst reducing overall consumption. It makes much sense. The problem is the magnitude of the abusive consumption that was artificially created by cheap credit thanks to bankers’ and politicians’ frauds, tricks and lies. The problem is no politician wants to take the bull by the horns and say the truth to the people, but the messenger normally takes the bullet. What is needed is a strong politician that is prepared to spell the facts out as they really are and take the measures that are necessary to re-establish over time a sane path. In elections where uninformed and greedy people are the majority this may not be possible as they will choose the messenger with the best, least worrisome message. It is one or the other. The latter will finally resort to a smoke screen (war normally) for the masses to be prepared to sacrifice their lives, work and freedom for a promised never-never land down the road.

  • To Kguy, et al.:

    There is a strong myth that runs through our society that the evils of the economy are caused by free markets. While I appreciate your fervor, I will assume you were not taught any other view of economic history. Yet there is a rich history and theory that runs counter to the conventional wisdom of which you are unaware. If you are truly open-minded and wish to learn of this alternative view then you are in the right place. I have found that argument is not going going to change the views of close-minded people. But to those who have an open mind and are willing at least to consider alternative views, I urge you to start in on our Reading List (see link, top of page). I can assure you that most free market advocates have read your view of history and were not satisfied with the quality of the answers and decided to read further. So it would only be fair if you would at least read about our ideas before you criticize them. Then we can have a conversation. But if your goal is to argue, then I’m afraid we’ll just both be frustrated with the outcome.

    Thanks for reading.

  • History has been so distorted that few know that FDR won in 1932 in part because he inveighed AGAINST Hoover’s deficits. Then as the recurrent victor, his people rewrote history and portrayed Hoover as a heartless balanced- budget hands-off President. Here is a quote from Wikipedia on this issue:

    (In the 1932 campaign) – “Roosevelt attacked Hoover for “reckless and extravagant” spending, of thinking ‘that we ought to center control of everything in Washington as rapidly as possible.’ Roosevelt’s running mate, John Nance Garner, accused the Republican of ‘leading the country down the path of socialism’.”

  • JR

    The idea that the government should not intervene is solid but could not a case be made that the state of liquidity in the global financial system is now all but zero? Thus non intervention would mean the reversal of many decades of “counterfeit credit expansion”? I’m using the definition of liquidity as espoused by Melchior Palyi, that is, the ability to meet your financial obligations.

    I would posit that it is far too late for non intervention. The banking system would unravel as the ‘assets’ of the banking system plunged in $ value, since they are denominated in $ (or whatever particular currency you have). Since most people today, at least in the ‘developed’ nations have their ‘money’ in the bank, as in they have a bank deposit, most people would lose everything but the shirt off their back.

    I would further posit that the real reason for the bailouts was because most people losing everything would lead to unsavoury social consequences rather than a nefarious central bank giving profits to its banking buddies, though it did do that.

    The real question is just when it will come apparent that the governments’ of most if not all ‘developed’ nations are hopelessly illiquid & so the credit of these governments’ is actually as good as a junior gold miner penny stock, that is, a hole in the ground with a liar at the top. Only then will these governments’ be unable to engage in “counterfeit credit expansion” & the government central banking system unravel & most people would lose everything but the shirt off their back….

  • Orlando

    There is more to this than just anecdote. The great depression ran from the banking panic of 1907 until the start of the Korean War. It was nearly ended by Warren Harding in 1921. His prescription is eerily similar to that of the modern Ron Paul and actually succeeded. He cut the size of government by over 50% and unleashed a great boom. Unfortunately he still had the Federal Reserve, which despite a gold standard, allowed credit to expand greatly during the period following 1921, mostly to crop up bond holders of bad debt (especially European sovereigns, sound familiar?).
    Mr Harding was the last president elected that was NOT a progressive (Coolidge, though winning re-election, followed Harding when he died in office). Sadly today, we get no such choice among the two parties, each major candidate is a progressive. The ‘conservatives’ espouse ‘capital socialism’ while the ‘liberals’ push ‘labor socialism’. Each one pushes government in the wrong direction for the WRONG reason. We the taxpayer are left with the bill.
    Accepting the fact that $57T in private and public debt constitutes a depression is the first argument. If recessions are now downturns in the business cycles, then a depression is that point where public and private debt is not sustainable.
    Once we agree on the diagnosis, maybe we can focus on what math it will take to fix the problem. The gradual bubblelism of the FED where the central bank allow bubbles to form gradually has now been proven to be fallacious not once but twice through two depressions. While one can argue the first one was not caused by the Fed, the second one clearly remains the central bank’s greatest disaster of all time for this republic. The worst part of this, is the fed is allowing credit to CONTINUE expanding. It will expand by another 10% before the end of this year, in order, to ‘facilitate’ the ‘great recovery’.

  • MNPilot


    Quick question: I have fresh copies of Mises’ “Human Action” and Rothbard’s “Man, Economy and State” on my desk. Do you have a recommendation as to which one should be studied first? I am familiar with the basic tenets of Austrian economics and the ABCT.


    • Congratulations! I would start with Rothbard as he made it a bit more intelligible. Mises is very dense. There is a study guide for Human Action which was written by Bob Murphy–I haven’t read it–but I would use it if I were starting in on H.A. Good luck.

      • MNPilot

        Thanks for the recommendation, Jeff. I plan on reading both, but I’ll start with MES per your suggestion. And I did buy the accompanying study guides – they seem necessary!

  • Cazzoduro

    Relative newbie to this site and economics in general, but I have an honest question: Can someone explain to me whether the lassez faire concepts that curbed the 1920-1921 recession actually led to some of the conditions that brought about the great depression?

    • Well, in a sense, yes. Subsequent to the Harding Administration, post-recession, the Fed did inflate and ease credit which led to the boom and eventual bust that occurred in 1929. See this article by Tom Woods.

  • blueridgeviews

    All recessions start with good times (lots of money chasing more money) until the debt load is too big and then the system needs to contract. Preventing the system from contracting only lengthens the pain for most.

    We haven’t corrected any of the things (tbtf) that got us into this mess. In fact we are still doing the same things except we need to print money now to keep the lie alive.