Rethinking the Great Depression: A New View of Its Causes and Consequences

by Gene Smiley

Ivan R. Dee • 2002 • 169 pages • $24.95

Reviewed by George C. Leef

Recently, I found myself in an e-mail argument with a friend who is intelligent and  well-educated—but not in economics. I had made the point that the best macroeconomic policy is one of government nonintervention, since we will get the optimal use of resources merely by leaving people free to pursue their self-interest. He replied that he saw a flaw in my argument, namely, that we suffer through periodic recessions and depressions. Yes, we do have them, I replied, but stunned him with the argument that all such episodes stem from bad government policy, not any inherent problem in the market system. He’d never heard that before.

Erroneous economic beliefs are everywhere, and one of them is that “markets are prone to recession.” Scholars have been mounting an attack against it for many years. The most recent contribution to the literature is Gene Smiley’s Rethinking the Great Depression: A New View of Its Causes and Consequences. Smiley, a professor of economics at Marquette University, has written a readable account of the Great Depression that pins the blame for its origin and duration on the blundering of government officials.

If the view propounded by Smiley is not entirely new—his sources show that the government-as-culprit view has been around for decades—his book does a splendid job of distilling earlier analyses into an account that will leave apologists for federal economic management looking for places to hide.

Smiley challenges the conventional thinking right away: “The Great Depression is often said to demonstrate the instability of market economies and the need for government oversight and direction. The evidence can no longer support such assumptions. Government efforts to control and direct the gold standard for national purposes brought on the depression. Once it began, government actions . . . caused it to be much longer and much more severe.” The old belief that the New Deal was needed to “prime the pump” of the faltering free market is about to take a pounding.

Some common, erroneous notions are quickly dispatched. For example, many people have been led to believe that the stock-market crash was the crucial event, a crash brought on by the “irrational exuberance” of the 1920s (as Alan Greenspan described a subsequent boom). Smiley points out that the stock market rose hand-in-hand with rising corporate profitability and that margin lending, often singled out as the culprit, had little or nothing to do with the rise of the market. “Margin requirements,” he writes, “were no lower in the late twenties than in the early twenties or in previous decades.”

The stock market didn’t cause the economic debacle. Smiley argues that the onus falls on the federal government’s monetary policies. The chain of events is complicated, but the book explains in clear, jargon-free English that when the major European nations returned to the gold standard after World War I, they did so at exchange rates that prevailed before the war and its inflation. The resulting economic turbulence led to the adoption of a different system, the gold exchange standard, which obligated only the United States and Great Britain to exchange their currencies for gold. “Inexorably,” Smiley writes, “the gold exchange standard began leading to deflation and economic contraction as countries sought to strengthen or maintain their monetary gold reserves.”

Deflation of the U.S. money supply burst the economic balloon. Business activity began to slow and many banks experienced trouble, some failing. The Hoover administration then stepped in with disastrous meddling—tax increases, high tariffs, and lectures on big business’s civic responsibility to keep purchasing power up by not reducing wages. The Federal Reserve System, established in 1913 to prevent economic recessions by giving the nation an “elastic” currency, failed miserably. The result was that a bad cold turned into severe pneumonia.

Hoover was crushed in the 1932 election, which put FDR in the White House. Smiley’s dissection of the many New Deal programs is devastating. He points out, for example, that the National Recovery Administration merely cartelized businesses, with the biggest firms dominating the creation of the “codes of competition” for their own benefit. Also, the beginning of the Social Security system in 1936 hit business, and ultimately workers, with new taxes just at the time the economy was starting to recover.

In 1938 the economy suffered a severe contraction, thanks to more federal intervention and bungling: the wave of strikes unleashed by organized labor following the Supreme Court’s cave-in on the clearly unconstitutional National Labor Relations Act, and the Fed’s deflationary policy, which, Smiley shows, reduced the money supply by 5.7 percent in 1937.

The author’s conclusion: “What failed in the 1930s were governments, in their eagerness to direct economic activity to achieve political ends—ends that were often contradictory.”

Rethinking the Great Depression is an excellent work for all who wish to correctly understand this terrible chapter in American history.

George Leef is book review editor for Ideas on Liberty.

The Pity of It All: A History of Jews in Germany, 1743–1933

by Amos Elon

Metropolitan Books • 2002 • 446 pages  • $30.00 hardcover; $15.00 paperback

Reviewed by Richard M. Ebeling

The ideological and then political triumph of liberalism in the eighteenth and nineteenth centuries ushered in a momentous period in human history. It ended the reign of absolute monarchs; it freed commerce and industry from the shackles of mercantilist regulations and controls; it heralded a new era of representative government and civil liberties. Freedom of the press and of speech, religion, and association became the hallmarks of an epoch that increasingly came to view individual liberty as the cornerstone of a humane, peaceful, and prosperous society.

Few groups benefited as much from the ascendancy of political and economic liberalism as the Jews in central and eastern Europe. Since the Middle Ages they had been confined to ghettos, often prohibited from owning and working land, and restricted from pursuing a wide variety of professions and trades. Severe limits were placed on their ability to live and work in capital cities such as Berlin and Vienna. They were burdened with special taxes, including marriage and birth taxes. Except for a small handful of privileged financiers and merchants who served the special interests of kings and princes, most Jews in central and eastern Europe were poor peddlers and traders who wandered the countryside earning meager livings.

Amos Elon’s The Pity of It All is a sweeping history of the Jews in Germany from the middle of the eighteenth century to Hitler’s rise to power in 1933. Their liberation began with a new awakening of self-improvement through what was called Bildung in German, or the refinement of the individual’s character through literature, philosophy, the arts, and the sciences. By this method they would rise above the cultural backwardness that prevailed throughout much of the Jewish community at that time, and at the same time they would fully integrate themselves into the best of German society. They would become Germans who happened to be of a Jewish heritage, rather than outsiders—Jews who happened to live in Germany.

Elon tells this story of cultural assimilation through the lives of leading Jewish figures, such as Moses Mendelssohn, the great proponent of reform and change within the Jewish community, and Heinrich Heine, one of the great poets and essayists in German literature. He details the lives and ideas of the many of the leading Jewish advocates of political and social liberty, and the prominent roles they played in the advancement of constitutionalism and liberal revolution in the 1840s and 1850s.

The tensions and doubts within the German Jewish community are also emphasized, as many Jews struggled with the issue of maintaining their Jewish faith or converting to one of the Christian denominations—a pressure felt by many because of legal and political restrictions that continued to close some doors of advancement, especially in government and the military, to non-Christians. There were also the tensions around the issue of what continued to make someone a Jew if he had abandoned Judaism and chose a secular life and a nonreligious code of morality.

The elimination of practically all legal, civil, and economic restrictions on Jews by the 1860s stimulated a huge burst of creativity and cultural contribution from them for the remainder of the nineteenth century and into the early decades of the twentieth century. In music, the arts and sciences, industry and commerce, literature and journalism, as well as in politics, the Jewish contribution was of a magnitude far greater than the number of Jews in Germany, which had never exceeded 1 percent of the country’s population. Liberalism’s freeing of the political chains binding them resulted in the German Jewish Prometheus ascending to unimagined heights of achievement, redounding to the benefit of the greater German society and the world as a whole.

Jewish successes and contributions to such a varied number of walks of life aroused envy, resentment, and fear among other Germans who were less successful in the market and cultural competition of a more open society. Failure and disappointment, dislike of change and innovation, the collectivist sentiments that still surrounded much of German culture and thinking, and the need to find scapegoats to explain away unfulfilled personal ambitions all resulted in a growing acceptance of anti-Semitic arguments and rationalizations for any supposed “shortcomings” of non-Jewish Germans.

But the “Jewish problem” could not be “solved” in a liberal climate of freedom and open competition. So the rising tide of militarism, state socialism, interventionism, and welfare statism in late-nineteenth- and early-twentieth-century Germany was reinforced and supported by those who wished to close the doors of the marketplace and the cultural arena to their Jewish competitors. The “final solution” to this “problem” was found in the death camps.

Richard Ebeling is the president of FEE.

The Voluntary City: Choice, Community, and Civil Society

edited by David T. Beito, Peter Gordon, and Alexander Tabarrok

University of Michigan Press • 2002 • 462 pages • $65.00 hardcover; $24.95 paperback

Reviewed by William L. Anderson

Since the late 1960s the typical picture of the U.S. city is that of a virtual cesspool of crime, poverty, and drug abuse. I remember a magazine cover of a smog-enclosed metropolis with the headline, “Our Sick, Sick Cities.” The late Sen. Hubert H. Humphrey of Minnesota regularly gave speeches in which he called for a “Marshall Plan to rebuild our cities,” and his theme has resonated with the public and the political classes ever since.

While libertarians often focus on the statist excesses of Congress, many cities in this country have gone beyond even the most coercive policies that have been dreamed up by the U.S. House and Senate. From banning all privately owned handguns to seizing private property for questionable “eminent domain” purposes to forbidding home religious gatherings (in violation of zoning ordinances), many cities have become places where government chokes freedom. Furthermore, many cities find huge portions of their municipal budgets being financed by tax dollars from Washington.

Thus one might think that cities are not the place to find free markets, private property, and voluntary transactions. That is not the case, however, as The Voluntary City aptly demonstrates time and again. In 15 excellent essays, various writers tackle issues in which problems faced by individuals in a community have been solved through voluntary private cooperation. In other words, the standard “market failure” arguments that many economists of both right and left use to justify government intervention simply are not true, to put it mildly.

For example, Bruce Benson, who has become well-known for his studies of law, justice, and the police, points out that the state does not have to create courts for a society to be able to dispense justice. Benson notes that in medieval Europe nearly 1,000 years ago the law merchant, which is a private system of international law, was already thriving and still is in existence today. Many firms and individuals, he points out, prefer to use private arbitration services to resolve disputes rather than depend on the slow, inefficient, and unpredictable state courts.

Benson addresses the assertion that private courts succeed only because the government court apparatus stands behind them to enforce their rulings. Such a claim is “demonstrably false.” Historically, he writes, merchants who refused to abide by arbitration rulings often found themselves subject to boycotts by other merchants, a tool that effectively disciplined the wayward business owners.

One of the enduring myths of American society is that before the establishment of the welfare state in the first half of the twentieth century, it was a “dog-eat-dog” world in which most needy individuals simply fell through the cracks. David Beito and David G. Green effectively destroy that false notion in their essays on mutual-aid societies that dotted the urban and rural landscapes of America, Great Britain, and Australia.

Beito points out that numerous fraternal societies existed, like Woodmen of the World, the Independent Order of Odd Fellows, the Sons of Italy, and the Polish National Alliance, which provided financial help to members and their families in need. That they were mutual-aid societies also implied reciprocity: those who received aid also could be counted on later to help others.

Green writes about the friendly societies of Britain and Australia that covered literally millions of people, providing various kinds of medical care and other welfare benefits. Like the fraternal societies of the United States, these organizations found their efforts crowded out in the twentieth century by the expanding state welfare apparatus, which handed out money without responsibilities attached.

The Voluntary City is must reading for those who champion not only private enterprise, but also a free society. From private arbitration to private police to communities that operate essentially under private law, these essays demonstrate that a voluntary society not only works, but prospers.

William Anderson is a professor of economics at Frostburg State University.

The Collapse of the Common Good

by Philip K. Howard

Ballantine • 2002 • 272 pages • $14.00 paperback

Reviewed by Harold B. Jones, Jr.

Books by aspiring politicians talk about what is wrong with the world so that their authors can offer to set things right. One title in this genre is Al Gore’s Earth in Balance. Another is Philip K. Howard’s The Collapse of the Common Good.

Howard is definitely a man with political ambitions. A New York lawyer who has led local initiatives, he is now ready for bigger things. A few days after a U.S. News and World Report article described Howard’s success in attracting the support of prominent politicians, George McGovern and Alan Simpson published a letter in the Wall Street Journal announcing that they had joined Howard in “a bipartisan coalition, Common Good.”

Beware of bipartisan coalitions. The only things about which old political enemies ever agree are the expansion of government and the reduction of individual freedom. This seems to be fine with Howard. He wrote his book, he says, because he believes that “people with responsibility . . . should have the authority to make decisions just because it seems right.” He abhors the view that “assumes justice is only about fairness to the particular parties.” What we need, he says, is a system of law that allows those in authority to make their choices with an eye to “the common good.”

“Common good” is his favorite expression. He does not see the nonsense in talking about a “common good” that is different from the well-being of the individuals of whom the commonality is composed. And what can “justice” mean if not fairness to particular parties?

But Howard does not think much of particular individuals: “Without pressure, most people won’t move.” His collectivist thinking is further evidenced in this quotation from Chester Barnard: “Ability is not something that is possessed by an individual independent of his environment.” Howard does not see that the question of individual ability turns on the fact that some people apply ideas and energy to the raw materials of the environment to create useful things, while others either try and fail or don’t try at all.

His heroine is Carmen Farina, principal of P.S. 6 in upper Manhattan. She took a failing school and created a beehive of student success, parental involvement, and educational initiative. “You can do things here,” said a third-grade teacher. According to Howard, this proves that we find freedom in someone else’s authority. Mrs. Farina, though, did not find the freedom to change the place by looking to someone else’s authority. She did it by selecting a purpose and beginning to move in the right direction. She defied the bureaucracy, broke the rules, and accepted responsibility. Her story is about the power of an individual.

Howard consistently misses this kind of thing. All his illustrations support the case for individual freedom and responsibility, but his conclusions incline toward the enhancement of federal authority. After railing against the inefficiency, incompetence, and demoralizing effects of bureaucracy, he suggests bureaucratic solutions. With regard to the discrimination cases that now clog the courts, he says, “the right to bring individual claims should be entrusted to an unbiased third party, such as the government.” How is the government to do this without creating a bureaucracy for that purpose? How can we imagine that the individuals of whom this bureaucracy is composed will be without bias?

There is only one way in which Howard’s catalog of modern ills can be used to lend weight to his arguments. F. A. Hayek said that by 1933 socialism and bureaucracy had carried Germany to the point at which it had to be governed dictatorially. Hitler was able to assume authority because many believed he was the only man powerful enough to get things done. Perhaps bureaucracy and the expanding welfare state are bringing the United States to a place similar to Germany’s in 1933. If so, our one hope lies in the thing that seems furthest from Howard’s mind: a reduction in the size and power of government.

Howard is a brilliant and entertaining writer. As a list of the things that have gone wrong with America, this book is worthy. But as an expression of political philosophy, it is feeble and its policy recommendations could hardly be worse.

Harold Jones is a professor at Mercer University and author of Personal Character and National Destiny (Paragon House, 2002).