What made the Great Depression different from the depression of 1893-97?

as answered on Quora:

Much of what I was taught in school about the Great Depression was wrong, or at the very least proved to be extremely skewed. Not a few accepted truths are little more than red herrings. Public schools in America do us all a great disservice, but regarding boom and bust cycles, you can usually count on them to have it backwards. The truth is more complex than commonly admitted, and will likely startle students of history.

But hey, instead of a long, scholarly explanation, I would like merely to mention a handful of issues:

  1. No one in government attempted, in the earlier debacle, what Herbert Hoover did to “heroically” save the country from the difficulties associated with the bust part of the boom-bust cycle. For examples of what he managed to “accomplish” — which included trying to prop up wage rates — consult Murray N. Rothbard, America’s Great Depression. And yes, you read that right, Hoover was no advocate for laissez faire. He was, instead, a celebrated progressive who lived up to his reputation by doing his damnedest to prevent the deepening of the depression — and for humanitarian reasons (and Hoover was indeed a great humanitarian). But instead of improving matters and steering the nation away from crisis, he made the situation far, far worse.
  2. Franklin Delano Roosevelt ran for the presidency in part on what we would now call (idiotically) an “austerity” program. But when he took the reins he doubled down on Hoover’s progressivist interventionism, offering These Benighted States* a great number of massive interventions into market adjustment processes, most famously the National Recovery Act. There are a lot of sources for this; I needn’t list any. Just recognize that FDR extended the depression well beyond his second term in office. The U.S. was, in effect, in a depression all the way through World War II (see the work of Robert Higgs on this, especially the concept of regime uncertainty). Nothing like any of this happened under President Grover Cleveland’s watch. And when World War II ended, the Keynesians were panicky: “another Depression!” was their cry. To their horror, a Keynesian stimulus was not delivered, yet the recovery was fairly swift, even with all those soldiers coming home and flooding the labor markets.
  3. The Great Depression was part of a worldwide, post-Great War trend, the precipitating element of which was Britain’s going back to the gold standard at parity after the wartime inflation. This daring policy might have worked out just dandy, but unions were strong, and downward price adjustments were thus disallowed in the industrial sector. Massive unemployment was the result — the obvious and predictable result. This was a known thing, yet Keynes was scraping together his “theory” to work around what amounted to a political logjam. (See W. H. Hutt’s The Keynesian Episode for a great analysis of this, including some great stories, like Sidney Webb calling the unionists “pigs.”) And in America? Well, enter a new institution, the Federal Reserve, which inflated the money supply in part to help the Brits, thus setting the stage for the crash of 1929. Though the late 19th century had huge monetary issues — America’s gold/silver bimetallism question was quite the mess, and was not resolved properly — at least old Grover did not have to out up with a central bank! This is the biggest issue. See Philips, McManus, and Nelson, Banking and the Business Cycle, for a thorough investigation of the monetary causes of the Great Depression, and the nagging disequibrium aspects to what has been called “the secondary depression.” It is also worth mentioning that the United States has always been plagued by goofy money and banking policy. See Calomiris and Haber, Fragile by Design, for the best discussion of this I have encountered.
  4. And then there is Smoot-Hawley. What can I say about this that has not been said? Well, that is not the point. Let me merely hint at a summary. The tariff bill hampered not only American trade, it hurt the very farmers it was meant to help (the agricultural sector being the one sector that never quite bounced back from the post-Great War bust). But there is more: it also inflicted a series of huge stressors to the banking system. And it did worse, its protectionism ushered in a global trade “war.” Thus setting the stage for World War II. It was devastating, and made the Great Depression far worse — which, after Hoover, FDR, and the Federal Reserve, did not need more such “help.”

The Great Depression was a perfect storm of bad government policy.

And note: I did not quite get to the thesis of “The Great Contraction” (Friedman and Schwartz, A Monetary History of the United States) or Irving Fisher’s brilliant debt-deflation theory. And I have skimped (but not ignored) the Austrian Theory of the Business Cycle.

There were structural problems at play in the depression during Grover Cleveland’s second presidency, sure. But they did not dovetail to work woe as happened later, under progressive politicians and that great, unwieldy, and quite dangerous progressive program, the Fed.


* I am especially fond of this manner of referring to our increasingly disunited (but nevertheless nationalistic) hodgepodge, the United States. My coinage. The people and its governments are such disappointments, having turned back on the original promise and persisting in an astounding cluelessness.
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