How to Recover from a Depression

A brilliant book on the U.S. Great Depression will be published in April

In April, a brilliant book on the U.S. Great Depression will be published, George Selgin’s False Dawn: The New Deal and the Promise of Recovery, 1933–1947. If you want to understand money and unemployment, the gold standard and the New Deal, read it. Selgin is a leading monetary economist and also a skilled historian. And he writes English with clarity and grace.

Brazil’s Depression was short and mild, as against the appalling condition of the U.S. by 1933, after four years of sickening decline—fully a quarter of the labor force was unemployed. If the recovery had been as quick as in Brazil, there would be no “Great” about it. But it lasted until the War masked it. Private investment was virtually zero all through the 1930s.

By contrast, the Covid downturn was over in a few months, and even the 2008-09 recession (also “Great”) was much less severe. The worst depression had been that of 1893—but that of the 1930s was deeper and longer.

In Brazil in the 1930s, coffee exports declined sharply, and, in a silly attempt to push prices up, Brazil burned a lot of coffee. But the U.S. introduced the same sort of policy, and worse, in the Agricultural Adjustment Act. Its “marketing orders,” for example, are used still to achieve coffee-burning.

France adopted similar interventions and had similar bad results. One expects crazy interventions by our dear friends les Français—after all, they’ve been doing it since the 17^th century. But interventions were not usual in the U.S. until Roosevelt and his “New Deal.” It had three goals—immediate Relief from starvation; longer-run Reform, such as the Federal government for the first time favoring labor unions; and Recovery from the Depression. Selgin shows that Relief worked, but the Reforms mainly slowed Recovery. And he shows that neither deficit spending à la Keynes nor money expansion à la Friedman were tried. Neither Keynesians nor monetarists can use the 1930s as arguments.

The usual explanation for the Recovery is the War. But if spending on guns, ships, and soldiers was it, why didn’t the Depression roar back when the U.S. in 1945 stopped making guns and ships, and sent home 16 million soldiers? Economists at the time thought it would come back. It didn’t. The U.S. boomed.

Why? Selgin finds that fear during the 1930s of the government taking over the economy caused private investment to cease. You don’t install new machines if you think socialism is coming. The fear was rational. Roosevelt during the 1930s repeatedly attacked “economic royalists.” And countries all over were falling into socialism and, especially, fascism, such as Vargas and Estado Nôvo.

Then during the 1940s, it became clear that the U.S. was not going to expropriate the capitalists. The capitalists promptly started investing again, putting new technologies into use, big time. Germany and Italy and Japan did the same, and also boomed. In the U.K. the Labour government of 1945-51 nationalized many industries. The U.K. stagnated.

The message? Simple. If you want prosperity, let investment happen.

Weekly column in Folha de São Paulo, Brazil
Translated into Portuguese for the newspaper.