ALL COMMON KNOWLEDGE IS WRONG FILES:

Prolonging the Depression: The New Deal: Time for a new look. (ROBERT L. BARTLEY, October 20, 2003, Wall Street Journal)

[Jim Powell of the Cato Institute] adopts the Milton Friedman view of the Depression--that it resulted primarily because an ignorant Federal Reserve let the money supply shrink, instead of maintaining steady growth. This view is for sure a big advance on the conventional wisdom. That is, it sees the Depression as the result of policy mistakes, not a spontaneous market failure.

I prefer the explanation offered by Robert Mundell, another Nobel Prize economist and my own longtime guru. In his Nobel lecture he stressed the failure of the international monetary mechanism; World War I disrupted the gold standard, and leading central banks had not constructed a good alternative. The result was a shortage of world liquidity, setting off a chain reaction of bad policies around the globe.

From this viewpoint, I would lay the first blame not on FDR but on Herbert Hoover, who was after all on watch when disaster struck. Mr. Powell ably recounts Hoover's mistakes in signing the Smoot-Hawley Tariff, and in vainly trying to balance the budget by raising taxes in 1932. The Republican president boosted the top marginal rate to 63% from 25%; Roosevelt took it to 75% and then 91%.

Hoover also started many of the New Deal measures, for example the Federal Home Loan Bank System that melted down in the 1990-91 recession. Most importantly, he was the original proponent of the notion of spontaneous market failure. In my view the decisive turn was not FDR's electoral landslide, but Hoover's rejection of his first Treasury secretary, Andrew Mellon.

The idea that Hoover was a big government liberal who responded to the incipient Depression with activist policies would not have fazed his contemporaries, but has been anathema to the Academy for decades for for two reasons:

(1) The Right has to have caused the Depression.

(2) The Left has to have cured it.

Thus, it was a great pleasure and a pleasant surprise when David Kennedy, in his entry for the Oxford History of the United States, Freedom From Fear, honestly presented the facts very much as above or as in Paul Johnson's indispensable Modern Times.

Posted by Orrin Judd at October 20, 2003 07:55 PM