1/6/12 - the cure for a recession

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 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 un-employment 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."


Murray N. Rothbard


America's Great Depression


Ludwig Von Mises Institute


1963, 1972 by Murray N. Rothbard


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