What Ended the Great Depression?: A new history clears the air on what worsened, and what eased, the macroeconomic crisis. : a review of False Dawn: The New Deal and the Promise of Recovery, 1933-1947, by George Selgin (David R. Henderson, 10/02/25, defining ideas)
Selgin doesn’t score cheap points. He carefully sifts through the evidence. His bottom line is that early parts of the New Deal, such as going off the gold standard, helped the economy recover but that later parts, such as the National Industrial Recovery Act, which cartelized hundreds of American industries, set the recovery back. Later actions by the Federal Reserve in 1936 and 1937 created a “double dip.” World War II helped end the Great Depression by causing FDR to quit castigating businessmen. The biggest surprise to many, which I wrote about here, and which Selgin quotes, is that neither expansionary monetary nor expansionary fiscal policy was responsible for the postwar boom. […]
One of the main contributions to economists’ understanding of why the Great Depression lasted so long is economic historian Robert Higgs’s idea of “regime uncertainty.” With the early New Deal, FDR had cartelized industries. After the Supreme Court found this cartelization unconstitutional, FDR switched to aggressive enforcement of antitrust laws and attacked successful businesspeople as “economic royalists.” This, argues Higgs, can account for the drying up of investment in the late 1930s. Selgin lays out Higgs’s argument. Selgin also points to FDR’s proposed tax on wealth, which, he argues, “was less concerned with raising revenue than with soaking the rich.”
But in 1940, Roosevelt, wanting to get into World War II, knew that he needed businesses on board. He did so by getting rid of his most anti-business aides and, after the United States entered the war, often replacing them with the so-called “dollar a year” men, businesspeople who worked for an annual federal salary of one dollar and were paid at the same time by the businesses they had left. This ended “regime uncertainty” and helped cause a boom. The boom actually started in 1940 and went through 1941.
What about the claim we often hear that wartime spending created a boom? Selgin quotes Higgs’s point that FDR’s turning the US economy into a command economy during World War II means that we can’t take prices and output data at face value. Because so much of production was for the war effort, this was not the usual economic boom. Selgin quotes one economist’s statement that “the war was, particularly for the United States, a deepening of the Depression.”
Selgin points out, as I detailed in my 2010 study “The US Postwar Miracle,” that many prominent Keynesians thought that the United States needed substantial federal government spending to avoid a post–World War II depression. In fact, federal spending was cut by over half. Yet we avoided a depression.