In the late 1920s the United States reeled from the blow of a profoundly wounded economy. The most likely culprit: government economic intervention -- rather than the lack of it.
Ask most economists, historians and even just regular folks to name the chief cause of the Great Depression and you likely will be told that it was the runaway, uncontrolled, irresponsible capitalism of the 1920s that was to blame: human greed carried to extreme.
Laissez-faire, free-market capitalism had been allowed to run amok in the 1920s, the argument runs, and the result was the prosperity enjoyed by the people of that decade, followed by a complete, unforgivable -- disaster the Great Depression, when 20 million Americans were out of work, soup kitchens and bread lines were commonplace and the nation reeled under the weight of a profoundly wounded economy that didn't right itself for more than a decade. Even then, the line goes, the economy improved only because government had taken the steps necessary to set the nation back on course.
Not only had unfettered, free-market capitalism caused the Great Depression, this theory declares. No, capitalism always will create depression because economic instability -- and often extreme economic instability -- inevitably are parts of the capitalist experience. And the only way to deal with this instability, the theory concludes, is for government to intervene to create stability and to make the ups and downs of the business cycle less onerous for people to bear.
"What's been circulated as true is that the Great Depression proved the failure of capitalism and proved the failure of limited government," Walter Williams tells Insight. Williams is a professor of economics at George Mason University in Fairfax, Va., and a nationally syndicated columnist. And that's the primary view of almost every influential liberal economist from John Maynard Keynes to John Kenneth Galbraith.
But is it the right view? Williams, for example, says that "nothing could be further from the truth. The exact opposite is true." The late libertarian economist Murray Rothbard didn't think so, either. In his influential book, America's Great Depression, which went through several editions in the 1960s, 1970s and 1980s, Rothbard argued that free-market capitalism wasn't responsible for the Great Depression. Just the opposite: Rothbard argued, convincingly, that it was government economic policy throughout the 1920s (and not the lack of government intervention) that must be held responsible for the collapse of American prosperity in 1929.
Furthermore, it was actions taken by the government and advocated by President Herbert Hoover (and continued by Franklin Roosevelt) that exacerbated the Depression and made it last so long -- far longer than any economic depression in the nation's history, and far more devastating than any previous depression.
In the past, depressions had lasted "a year or two," Rothbard notes. "Prices and credit contract sharply, unsound positions are liquidated, unemployment swells temporarily, then rapid recovery ensues." This pattern had characterized "such severe but brief crises as 1907-1908 and 1819-1821" and the "hardly noticeable recessions of 1899-1900 and 1910-1912.
"Yet the Great Depression that ignited in 1929 lasted, in effect, for 11 years," writes Rothbard. Why? What was different in 1929 that hadn't been true earlier? The answer, Rothbard explained, is intrusion of government. Far from seeing the 1920s as an era of untrammeled capitalism under three Republican presidents, Warren G. Harding, Calvin Coolidge and Hoover, Rothbard showed that the 1920s had witnessed a great deal of disastrous government intervention and experimentation in the U.S. economy.
"Government and its controlled banking system are wholly responsible for the boom (and thereby for generating the subsequent depression)," Rothbard declared in no, uncertain terms. …