It always seemed simplistic. Economists and central bank managers who claimed to be deep students of the Great Depression of the 1930s confidently told us what should have been done then to avoid the crisis. They made clear that they would know what to do to avoid another one.
According to economists ranging from John Maynard Keynes and Milton Friedman through Ben Bernanke, it was just a question of central banks and governments using appropriate monetary and fiscal policies. If they had managed to get these right back in 1929, we were told – if the Federal Reserve banks had acted faster to stimulate liquidity, if governments had goosed economies earlier with bigger wallops of stimulus spending – there would not have been a problem. The Great Depression was really caused by economic mismanagement.
The corollary was that good economic management would protect us from another depression. And so we have seen the grand social engineers at work – the central bankers driving interest rates to near zero while trying to expand the money supply, governments around the world spending and spending to stimulate activity. When their big schemes seem to fail, we are told that the schemes weren’t big enough, that they must try harder. Surely the economists and the politicians will find a way to save us from our economic woes.
What if it had all been a con game, based on a naive, self-serving misreading of history and the capacity to manage economies? Before the age of Friedman, Bernanke and apologists for the American New Deal, there had been a view of the Great Depression as a global economic correction caused by vast imbalances of supply and demand on world markets that had their origins in the dislocations caused by the Great War of 1914-18, and excessive lending in the 1920s. On this view, held by Herbert Hoover and some of his supporters, not a lot could be done to ease the crisis until markets cleared or righted themselves. The patient would recover when nature took its course.
The danger of excessively active fiscal and monetary policy was that it could delay market corrections, destroy confidence, and make things worse. One of the major reasons why the United States remained depressed throughout the 1930s was the intensity of the clash of economic opinion. The U.S. was polarized then, much as it is now. FDR and the New Deal could not restore confidence and enthusiasm in the private sector, because, as with Republicans today, there was widespread distrust in their panaceas. The real economic sickness was more deeply rooted, less treatable, and would only ease with time.
Very broadly (and very sadly) speaking, history does seem to be repeating itself in our time. Years and years of undue expansion, both in housing and in credit, have flooded markets throughout the Western world. Canute-like in their hubris, really no different from other self-deluded (and self-important) social engineers, the central bankers and politicians have tried to reshape the course of history. Hindered by the consequences of their own series of bad policy mistakes – Europe’s premature experiment with a single currency being the most obvious – the managers have created a lack of confidence in their efforts analogous to that of the 1930s. Policy debates have become deeply polarized between spenders and savers, with paralysis the most likely consequence.
Eventually, markets, such as the U.S. glut of housing, will clear and people will go back to work. Debt will be paid down. Obese and addicted societies, like obese and addicted people, eventually have to face up to the need to live with fewer pleasures of the moment, hard though that may be. One of the problems bedevilling all addicts who are trying to reform is the advice they get from well-meaning or self-serving “experts” who say their withdrawal can happen without sacrifice or discomfort, or does not need to happen at all.
The danger of listening to the people who oversimplify the past and then oversimplify the present (I won’t begin to talk about the current Ontario election), is that they really can make things worse, especially when they propose to dope us up on more of the same. The longer we avoid accepting complex, unmanageable realities, and the real discomforts involved in convalescence and recovery, the more we risk the long-term future for our children and grandchildren.
Michael Bliss is a historian and author. His most recent book is Writing History: A Professor’s Life .Report Typo/Error
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