Tuesday, March 10, 2009

What ended the Depression?

Subject to debate. Some say it was the New Deal. Others say, no FDR's policies prolonged the Depression, it was WWII. Some have a hybrid theory.

As this relates to present day debate, the above theories are all effectively Keynesian. To the extent that Republicans support the idea that WWII got us out of the Depression, Democrats can somewhat logically claim a "gotcha", that large government spending did the trick after all.

I've finally seen some push back.

From Amity Shlaes (author of The Forgotten Man) and the revered Thomas Sowell, we're getting this argument: The war and the lead-in to it forced FDR to scale back his New Deal policies, allowing the economy to recover. Shlaes further argues that anticipated Republican mid-term gains stifled intervention and eased business concerns.


Anonymous said...

I remember the high school explanation was that WWII ended the Great Depression because it forced everyone to buy war bonds. However, it was a little fuzzy why the economy didn't re-crash afterwards when presumably the gov't would need to start paying those bonds back.

Stupid high school...


Sockless Joe said...

I'm still not necessarily satisfied with the Shlaes/Sowell explanation, but I'm glad that it's there. Needs some more fleshing out, and a few more people to kick the tires on that theory.

I like the fact that it's closer to "the economy just sort of fixed itself eventually" rather than "X did it".

Samay said...

The economy didn't re-crash because suitable regulatory oversight had been established during the depression and the war.

That oversight kept everything running pretty smooth until people (mostly republicans with some DLC) really succeeded at hacking it away in the late 90s and 2000s

Sockless Joe said...

I think people were encouraged to continue to hold those bonds for a long while and roll them over when they matured. I'd guess that was an easy sell considering the lack of confidence in the banks that persisted long after FDIC was instituted. My late great-grandmother kept thousands of dollars in cash stashed in her house into the 1990's.

Final passage of Gramm-Leach-Bliley was 90-8 in the Senate and 362-57 in the House.

The relaxation of capital reserve requirements was IMO the real fuel on the fire. I think even if Gramm-Leach had not passed that the reserve chages would have eventually produced a disaster all on their own.

Ironically, a big selling point for changing the capital reserve requirement was that it would be counter-cyclical. Faced with asset deflation, a bank would not have to raise massive amounts of capital to meet reserve reqs. But the banks went ahead and took enough rope to hang themselves with.