Five myths about the great depression

Andrew B. Wilson has an interesting piece in the Wall Street Journal on Five Myths About the Great Depression: Herbert Hoover was no proponent of laissez-faire. The five myths:

1. Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-the-other way Republican who clung to the idea that markets were basically self-correcting.
2. The stock market crash in October 1929 precipitated the Great Depression.
3. Where the market had failed, the government stepped in to protect ordinary people.
4. Greed caused the stock market to overshoot and then crash.
5. Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight.

On this last point Donald J. Boudreaux writes,

Andrew Wilson is right: the New Deal did not end the Great Depression ("Five Myths About the Great Depression," November 4). No less an authority than FDR's Treasury secretary and close friend, Henry Morganthau, conceded this fact to Congressional Democrats in May 1939: "We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!"*

Indeed, FDR's market-suffocating policies are almost surely what put the "Great" in "Great Depression."

On the first issue of Hoover's support for "laissez-faire" and free trade in particular Pat Toomey writes

On May 4, 1930, 1,028 economists signed a petition urging Congress and President Herbert Hoover to reject the Smoot-Hawley Tariff Act, arguing that "increased restrictive duties would . . . operate, in general, to increase the prices which domestic consumers would have to pay." Neither Congress nor the president listened, but the stock market certainly did.

Though many associate the Great Depression with the stock market crash on Oct. 29, 1929, the market actually rallied during the six months following Black Tuesday, while the defeat of Smoot-Hawley appeared likely. The market turned south again in April 1930 as those hopes of defeat gradually dimmed.

The Dow Jones Industrial Average sank a full 8%, from 250 to 230, over just two trading days in June 1930, in direct response to the Senate's passage of Smoot-Hawley and Hoover's announcement that he would sign it. Exacerbated by other flawed governmental policies, an international trade war continued to drive the market down until the Dow hit a low of 41 on July 8, 1932, having lost 89% of its value from its September, 1929 high. It would be 25 years before the market recovered its 1929 peak.

On this Bryan Caplan writes

These days a lot of economists blame the Smoot-Hawley Tariff Act for worsening the Great Depression. Herbert Hoover considered this hypothesis back in 1932 - and angrily rejected it.

Note: When Hoover says "our opponents set up the Hawley-Smoot tariff bill," he means that the opponents are blaming the tariff for the depression, not that they voted for it!

In the face of these gigantic, appalling worldwide forces our opponents set up the Hawley-Smoot tariff bill--changing as it did the tariffs on less than one-sixth of our own imports, one one-hundredth of the world's imports, and introduced long after the collapse started-as the cause of all this world catastrophe. What an unspeakable travesty upon reason this explanation is!

Suppose that we had never had the Hawley-Smoot tariff bill. Do you think for one moment that this crushing collapse in the structure of the world, these revolutions, these perils to civilization would not have happened and would not have reached into the United States ?

And yet, in order to make a political campaign by which they can play upon discontent so that they could hope to create a protest vote, they are compelled to set up this travesty of argument.

As to the New Deal in general, even Ben Bernanke isn't that enthusiastic about its results in dealing with the depression,

Our [work with Martin Parkinson] own view at present is that the New Deal is better characterized as having "cleared the way" for a natural recovery (e.g., by ending deflation and rehabilitating the financial system), rather than as being the engine of recovery itself.

(Ben Bernanke and Martin Parkinson, Unemployment, Inflation, and Wages in the American Depression: Are There Lessons for Europe? The American Economic Review, Vol. 79, No. 2, Papers and Proceedings of the Hundred and First Annual Meeting of the American Economic Association (May, 1989), pp. 210-214)

But still the myths survive.