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The Great Depression Through Fresh Eyes

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The course to audit this semester at Berkeley would be Brad DeLong’s Econ 115. He’s been drilling down on the Great Depression and doing his best to extract lessons that are useful for our current circumstances. In particular, DeLong’s October 1 lecture “The Industrial Financial Business Cycle and the Great Depression” (which can be downloaded here) is worth a gander. It includes a review of the attitudes that leading economists of the Depression Era (including von Hayek and Schumpeter) developed in real time, and how this affected the situation.

At its nadir, the Depression was collective insanity. Workers were idle because firms would not hire them to work their machines; firms would
not hire workers to work machines because they saw no market for goods; and there was no market for goods because workers had no incomes to
spend. Orwell’s account of the Depression in Britain, The Road to Wigan Pier, speaks of “several hundred men risk[ing] their lives and several hundred women scrabbl[ing] in the mud for hours… searching eagerly for tiny chips of coal in slagheaps so they could heat their homes.” For them, this arduously-
gained “free” coal was “more important almost than food.” All around them the machinery they had previously used to mine in five minutes more than they could gather in a day stood idle.

DeLong highlights the historical lessons that were unlearned by leading economists of the day. He takes us on an excursion, courtesy E.M. Forster, of Britain’s financial crisis of 1825—peaked, as DeLong highlights, by a series of episodes that parallel America’s rollercoaster ride in the last decade—in which the Bank of England intervened aggressively to avert a catastrophe. DeLong summarizes:

Since 1825, the first rule in a financial crisis has been for the government to rescue the banking system—to try to prevent or moderate or offset the
collapse of risk tolerance. And it was this rule that was broken in the Great Depression. And that is why the Great Depression was so great.

The core of the lecture describes the analyses of leading lights of the Austrian school and applied by President Hoover. The view that prevailed was that of “liquidationists,” like von Hayek, who asserted that the Depression was unavoidable: there was only the choice between Depression now or still harsher Depression later. “Curiously, the Great Depression was pretty much the only time that the ‘liquidationist’ view carried the day.”

DeLong’s piece helps us understand the remarkable consensus that existed among economists in favor of a bailout in the last quarter of the Bush presidency, and it gives us a strong feel for the risks of the “do nothing” attitude of bailout critics on the right. These are high-stakes decisions on which the lives and fortunes of hundreds of millions hang. In the time of tea-bag histrionics, it’s a pleasure to read a calm, literate rehearsal of the major issues and the options available.

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