Great Myths of the Great Depression: Literature Review

Great Myths of the Great Depression was written by Lawrence W. Reed who holds a Bachelor of Arts in Economics from Grove City College and a Master of Arts in History from Slippery Rock State University. According to The Mackinac Center for Public Policy, “In the past twenty years, he has authored over 1,000 newspaper columns and articles, 200 radio commentaries, dozens of articles in magazines and journals in the U. S. and abroad, as well as five books.” Mr. Reed has been the President of The Mackinac Center for Public Policy for the last two decades and is a promoter of free market economics. The purpose of Great Myths of the Great Depression is to criticize the policies of Herbert Hoover and Franklin D. Roosevelt’s during the Great Depression in the United States. According to Reed, the notion that Hoover’s laissez faire approach caused economic collapse is misunderstood, since Hoover was not as passive during the early years of the downturn. Likewise the interventions of Roosevelt’s multiple government agencies might have caused a prolonged and deeper depression, despite the fact that many give credit to Roosevelt for dragging the economy out of the worst slump in recent history.

The research question that Reed poses is one that is normative in nature but also had the buttress of positive economics when dealing with the outcomes of policy making during the Great Depression, namely Reed discusses the huge blunders perpetrated by the Federal Reserve Bank of the United States in tandem with United States Congress. Reed addresses the issue in four parts: I. Monetary Policy and the Business Cycle, II. The Disintegration of the World Economy, III. The New Deal, and IV. The Wagner Act.

Reed points to the fact that during the onset of the Great Depression the Federal Reserve contracted the money supply by one third which made the start of a recession much worse. The end of the roaring twenties was coming to a screeching halt in America and the monetary authorities-fearing inflation as a result of decreased economic activity-slow the growth of the money supply. Many believe that the fear of inflation was unfounded, “pointing to relatively flat commodity and consumer prices in the 1920’s as evidence”, prior to the Feds monetary contraction which Reed believes helped spark the onset of the Great Depression.

Congressional judgment on economic matters also seemed to also be lacking in a few areas which made matters worse in the U.S.. The disintegration of international trade as a result of plummeting incomes was amplified by legislation restricting trade, specifically imports into the United States. The Smoot-Hawley Tariff was drafted for the purposed of protecting domestic producers by discouraging imports, but also had the adverse effect of impacting foreign income which resulted in a decrease in foreign imports-U.S. exports; as foreign income dropped so did their demand for U.S. goods and U.S. exports also feel in unison with the reduction of U.S. imports. Foreign countries retaliated with tariffs of their own and the whole world fell into a concerted contraction orchestrated by the U.S. Congress.

Reed argues that the massive government spending and growth as a result of Roosevelt’s New Deal where detrimental to recovery and growth. The Wagner Act which made resistance to organized labor by businesses difficult circumvented legal procedures for arbitration of labor disputes. New courts were appointed to arbitrate labor disputes and frequently the courts sided with employees. According to Reed, these rulings were biased and served as a deterrent to businesses to implement cost saving measures, like reductions in labor resulting in higher prices. Unions helped increase the minimum wage which in turn placed more of the lowest skilled workers on the bread lines decreasing aggregated demand even further. The populist movement supported by Roosevelt was to the detriment of employers and employees’ alike, huge increases in taxes stifled investment in the private sector and lead to detrimental crowding out effects. All of these actions decreased efficiency and productivity growth which is vital to the health of the economy in both the short run and the long run.

Reed’s Great Myths of the Great Depression serves not only as a warning to current policy makers but also a reminder that bounded rationality and political pandering to constituents often leads a country in dire economic situations towards harmful radical reforms. Reed expressed his ideas in a clear and concise manner; the numerous analogies and descriptive narratives serve to establish an emotional connection to the Great Depression which might not be present with contemporaries until this current economic crisis. The authors’ ability to establish causal relationship is lacking in the sense that events are connected and rarely is the explanation of causes explained convincingly. Reed does however bring a large amount of figures on unemployment and financial market movements during the Great Depression which also establish the relevance of his research to our current recession. Future applications of Reed’s research can be applied to the efficient implementation of fiscal and monetary policy during severe crisis in addition to the study of government inefficiency and bureaucratic impediments to self correcting market forces.