Their Great Depression and Ours: Part I

By James Livingston

Mr. Livingston teaches history at Rutgers. He's finished a book called The World Turned Inside Out: American Thought and Culture at the End of the 20th Century (Rowman & Littlefiel, 2009). He blogs at politicsandletters.com.

Now that everybody is accustomed to citing the precedent of the Great Depression in diagnosing the current economic turmoil—and now that the Congress has agreed on a bail-out package—it may be useful to treat these episodes as historical events rather than theoretical puzzles. The key question that frames all others is simple: Are these comparable moments in the development of American capitalism? To answer it is to explain their causes and consequences.

Contemporary economists seem to have reached an unlikely consensus in explaining the Great Depression—they blame government policy for complicating and exacerbating what was just another business cycle. This explanation is still gaining intellectual ground, and it deeply informed opposition to the bail-out plan. The founding father here is Milton Friedman, the monetarist who argued that the Fed unknowingly raised real interest rates between 1930 and 1932 (nominal interest rates remained more or less stable, but as price deflation accelerated across the board, real rates went up), thus freezing the credit markets and destroying investor confidence.

But the argument that government was the problem, not the solution, has no predictable political valence. David Leonhardt’s piece of last Wednesday in the New York Times (10/1/08) is the liberal version of the same argument—if government does its minimal duty and restores liquidity to the credit markets, this crisis will not devolve into the debacle that was the Great Depression. Niall Ferguson’s essay for Time Magazine on “The End of Prosperity,” takes a similar line: “Yet the underlying cause of the Great Depression—as Milton Friedman and Anna Jacobson Schwartz argued in their seminal book A Monetary History of the United States 1867-1960, published in 1963—was not the stock market crash but a ‘great contraction’ of credit due to an epidemic of bank failures.” Ben Bernanke’s argument for the buyouts and the bail-out derives from the same intellectual source.

http://hnn.us/articles/55368.html