The Current Crisis as the Institutional and Ideological Residue of the Great Depression

This semester I'm teaching American Economic History and using, among other books, Bob Higgs' Crisis and Leviathan.  The students love it and I never get tired of teaching it.  One of the points Bob hits over and over is how crises leave residues, both institutional and ideological.  Even as the scale of government retreats after a crisis, the scope does less so as many of the powers created by the crisis remain in place, often embodied in institutions that outlive it.  And crises obviously change the way we view the world, and those ideological changes linger on as well, often embodied in textbooks and "what everyone knows."

In reading a student paper today, which showed a glimpse of the point I'm about to make, it struck me that the current crisis can fruitfully be understood as the product of both kinds of residues.  More specifically, as I've argued in my Open Letter, the causes of the crisis are to be found in a variety of banking regulations and powers of the Fed, many of which have their roots in the Great Depression.  Fannie Mae was created in 1938 and the Fed was given the power to conduct open market operations in 1935.  Federal deposit insurance dates from this era as well.  More generally, the Great Depression legitimated the kind of regulatory powers that were deployed to push up rates of homeownership.  These are powers government might not have had were it not for the Depression.

On the other side, the response to the current crisis reflects the ideological residue of the Great Depression in the assumption that we need massive government intervention to stabilize individual markets and the macroeconomy more generally.  The reaction to the problems in financial markets has very much been an example of these residual ideological beliefs that find many of their origins in the 1930s.  I'm thinking here of the concerns about contagion and the generalized belief that market-based banking was shown to be unstable in the early 30s.  The bailout reflects these ideological residues as well. (Yes, I realize that the bailout is one great rent-seeking festival, but my point is to explain why intellectuals, the media, and many citizens support it even without a direct stake in the matter.)

We really are living out the extended negative unintended consequences of the Great Depression.  If so, it only goes to show how important it is for us not to do what precisely we seem to have done in the last few months: over-react to a questionable "crisis" in ways that create new institutions that will long outlive the current situation and lead us to tell new stories that will harden into uncritically accepted ideological narratives for future generations.  We are currently suffering from the sins of Hoover, FDR, and many idea-makers of that era.  We should have learned our lesson, but it would seem not.  I hope we still have time to control the narrative (I'm less sure we have the time to undo the institutions) and do better by our children and grandchildren than prior generations did by us.

Comments

[MattYoung]

The federal USA is simply to big an aggregation to have a stable financial system. With diverse and decoupled economic regions, the term structure used by the Fed can only be closely synced to one region at a time. Hence, the unstable political system.

[Sandy Ikeda]

Back in July, you asked what we thought was the most dangerous fallacy of fact that the reasonably well-informed layperson believes about economics. Here was mine:

FALLACY OF FACT: That the Great Depression was a market failure.

[Frank Thomas]

This whole thing reminds me a little of Isaac Asmov's Foundation Trilogy where Hari Seldon's branch of mathematics, known as psychohistory, uses the law of mass action to accurately predict the future and ward off or reduce the coming Dark Ages. Recordings of Seldon pop up every few 1000 years or so to direct people's actions and folks just seem to be along for the ride until an anomaly crops up. (Then they're in a real pickle.) But then there is the secret Second Foundation that Hari Seldon set up to tweak the system in the event of just such an anomaly.

In all of this there are people who don't know what's going on, there are people who think they know what's going on and there are people who really think that they know what's going on. What's really going on?

I live in a region where the TVA changed the landscape and the lives of people. I have to ask myself, "What would my life have been like if there had been no TVA?" Even knowing that TVA was there for a purpose, not as an end in itself, I cannot say if life here would be better or worse. It's easy to see paths that reach higher and paths that take us much lower. It's easy to sell a line of reasoning based on "What if's," but it's hard to make an air tight case (unless you are a part of the Third Foundation - in that case you wouldn't be talking about all this. You'd just smile. :)

Readers of this blog may be interested in "Pennyland - Echoes of the Great Depression" which I created from an original song written by my brother. It takes the words of FDR in his 1933 inaugural address at face value and combines them with depression era photographs. Here's the link to the video:

http://www.youtube.com/watch?v=9T9-iz40K6o

It's also located at www.pennyland.org

This is not meant as a political statement, but rather as an attempt to put a face on something that so often appears academic. It is 5 minutes in length. If you find it thought provoking, I'd appreciate your sharing it with others.

Frank Thomas

[D S Lamont]

One of the things we learnt through painful experience in many countries during the Great Depression was the need for international economic cooperation, and the rejection of economic nationalism. This is a hugely important lessont again today. One of the ways to see it is through studies of Keynes such as "John Maynard Keynes and International Relations" by Donald Markwell. A retreat today into economic nationalism would be disastrous - and so would a failure of international cooperation to achieve coordinated measures to find a global remedy to aglobal problem.

[Dave Prychitko]

Steve:

In addition to the Froyen textbook I've used to teach Intermediate Macro over the last ten years, do you think Crisis and Leviathan could be used as a supplementary text along with The Austrian Theory of the Trade Cycle (ed. Ebeling) text?

[Steve Horwitz]

It could I guess! You might also look at Higgs' collection on Depression, War, and Cold War. Not enough of those essays would be on point (but then again, C&L really only has one chapter on the GD), but it does have the Regime Uncertainty paper.

Gene Smiley has a recent book on the GD that might be a better choice for a supplement. I'm currently in the middle of Amity Shlaes *The Forgotten Man*, which is terrific, but probably better for AEH than macro.

The Ebeling edited volume is fine. I think, depending on how good your students are, that Roger G's book would work too. If my book were cheaper....

[lwaaks]

Although I am neither student nor teacher, I second S. Horwitz' recommendation of Gene Smiley's book on the Great Depression. I read it a few years ago and remember it being an excellent overview. For some reason, I have an extra copy if you want it for free.