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It ain’t so, Joe

Commenting on the appearance of the 100th issue of the Journal of Economic Perspectives, its founding editor, Joseph Stiglitz, remarks (page 22) that a diversity of perspectives is

“especially important in a field known for having certain orthodoxies—orthodoxies that dominate for a while and then fade, making the profession sometimes look less like a science than it would pretend to be. A case in point is the well-known and widely documented belief within the profession as the economy entered the Great Depression that markets were self-correcting and that government intervention would be a mistake. Another is the monetarist fad a half-century later.”

It takes a lot of chutzpah to offer the Great Depression as a counterexample to the claim that government intervention is a mistake. Thanks to the evidence and arguments made by the monetarists Stiglitz also derides, it is now generally accepted that the major fault for the Depression lies with the Federal Reserve System and the Bank of France, which as central banks were creatures of government intervention. (And here is the connection to free banking: the actual or plausible hypothetical behavior of free banks offers a standard of comparison to what central banks did, especially the massive accumulation of gold by the Federal Reserve and the Bank of France. Because gold earned no interest, it is implausible that free banks would have accumulated it on such a large scale, creating deflationary pressure. I know of no actual large-scale free banks that held such high ratios of gold reserves.)

I recommend for Stiglitz or anybody else who thinks as he does the sections on the Depression from the books below:

Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960 (this had better be a re-reading for any economist who is beyond graduate school)

Benjamin Anderson, Economics and the Public Welfare (an account of the period by a first-hand observer)

Richard Vedder and Lowell Galloway, Out of Work: Unemployment and Government in Twentieth-Century America (describes labor market interventions that kept unemployment high in the United States during the Depression)

H. Clark Johnson, Gold, France, and the Great Depression, 1919-1932 (the Bank of France’s role in the Depression)

Jim Powell, FDR’s Folly (a well-written popular survey of the multitude of regulations imposed during the Depression in the United States and how they impeded recovery)

And, David Glasner would add, Ralph Hawtrey, Trade Depression and the Way Out.

UPDATE: Now I know where Stiglitz gets his  ideas on the Great Depression: he makes them up. In an interview broadcast on National Public Radio on June 17, I heard him claim that Herbert Hoover imposed austerity.  Under Hoover, though, federal spending increased from 3.4 percent of GDP in fiscal 1930 (July 1929-June 1930) to 8.0 percent in fiscal 1933 (July 1932-June 1933). A budget surplus of 0.8 percent of GDP in fiscal 1930 turned to a deficit of 4.5 percent in fiscal 1933. (See page 24 of this.  Remember that at the time, presidential terms began in March.) Hoover's decision to raise tax rates was an austerity-type decision. But here is Stiglitz saying in 2010 not to extend the Bush tax cuts, or in other words, to imitate Hoover. For more details, see a recent paper by Steve Horwitz.