Echoes of the Great Depression

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THE ECONOMIC POLICIES of the 1930s are a continuing source of myth and confusion. Many people believe that capitalism caused the Great Depression and that Pres. Franklin Roosevelt helped to end it. The events of the 1930s influence economic policymaking today. Many people think that we need a big government to prevent, or reverse, recessions. Yet, the 1930s illustrate that activist policies increase, not decrease, economic instability. Government interventions reduce the flexibility that markets need to adjust to shocks and return to growth.

The Depression was a uniquely severe contraction. Real gross domestic product fell for four years before finally beginning to recover. Real output only regained its 1929 level in 1936, but then plunged again in 1938. The unemployment rate stayed persistently high at more than 14% from 1931-40. Government policies, meanwhile, …