On the New Deal and Great Depression

This article seems a bit statist to me, but I still like it.

American Interest Online:

A severe depression in 1920 saw industrial production fall by about 25 percent; the Bureau of Labor’s wholesale price index fell by about 46 percent from 1920–21; unemployment rose from about 560,000 in 1918 to five million in 1921. Nonetheless, this severe contraction was short-lived and recovery was swift beginning in 1922. The Federal Reserve, having opened its doors only in 1913, fueled the recovery with easy credit and the purchase of government securities. In addition, proposals by President Harding to substantially roll back taxes on the wealthy, which the Wilson Administration had raised to fund the war, were eventually enacted during the Coolidge Administration.

The roaring boom that followed from 1923 to 1929 was one of the most sustained and impressive in U.S. history. This was truly a golden age, with sharply rising GDP, vastly increased investment, stable commodity prices, rising real wages, modest unemployment, a booming stock market and important technological advances. New products like cars, trucks, radios and other household appliances spread throughout the general population. Credit innovations (especially the spread of payment on the installment plan) led to expanding household consumption. The ability to borrow and increase consumption in an orderly fashion seemed to belie standard intuitions about avoiding debt or constraining purchases to one’s current level of income. The idea of buying capital goods with money one did not yet possess quickly morphed from being seen as evidence of imprudence to being well within the range of proper bourgeois behavior.

[...]Following the September 1929 stock market peak, the Dow Jones fell 17 percent within a month. A misleading initial recovery was followed in October by the great Crash and continuing steady declines until the market had lost some 89 percent of its value at its 1932 bottom. [...]Within the first year industrial output fell 12 percent from its 1929 peak, fell another 21 percent in 1930, and in total fell by almost 50 percent from 1929 to 1932. GNP contracted by a third in three years. Unemployment hit a high of some 25 percent. Though the timing abroad was slightly different, much of Western Europe was also hit hard.

[...]Conventional wisdom tends to treat President Hoover as a clueless advocate of laissez faire who refused to stimulate the economy in the dramatic downturn. Franklin Roosevelt, on the other hand, was the heroic leader who both saved the day and transformed the American economy through his promotion of the New Deal.

[...]Hoover did not advocate “do-nothing” policies. Indeed, many of his interventions—for example, his attempts to balance the budget by raising taxes in 1932, and strengthening support for the gold standard—worsened the economy for reasons orthodox theory would have predicted. [...]Hoover initiated the Reconstruction Finance Corporation to support failed banks, to fund public works, subsidize state relief and otherwise engage in policies that presaged the widely praised interventions of the Roosevelt era.

[...]Specialists agree, for example, that the Fed’s focus on curbing speculation in the stock market by restricting lending—as well as its unwillingness to extend liquidity and expand the money supply in the face of a collapsing economy and a wave of bank panics in the early 1930s—deeply aggravated the severity and extent of the downturn. Allan Meltzer has added that the Fed’s failure to expand the money supply stemmed from an inability to distinguish between real and nominal interest rates. (In a period of rapidly increasing deflation, even “low” nominal rates could be tantamount to extremely high real rates.) Worse still was the Fed’s decision to raise interest rates in 1931 for fear that not doing so would undermine the integrity of the gold standard.

[...]And why would a policy oriented toward stimulus and expansion include rising tax rates throughout the Western world, with the United States, in particular, reversing the trends of the 1920s and raising top rates from a 1929 low of 24 percent to a top rate of 79 percent in the late 1930s, and then 94 percent during the War?